Sandi Egan wrote:
“Currently popular bailout plan works like this:
The bank rewrites your mortgage agreement, lowering your debt from $1M to 85% of home’s current value, 680K. In exchange government insures your mortgage, meaning that if you default on it again the taxpayers will carry any losses, not the bank.
This way the bank benefits from not having to go through foreclosure process and possibly facing less write downs. The FB benefits, because his enormous loan was just forgiven. Effectively, he bought the house on the peak for $680K, 15% below TODAYS market value. The RE market benefits, because there is one less distressed property on the market. The only people who don’t benefit are the taxpayers, who are exposed to (somewhat lessened) risk of the FB defaulting again, without any prospects for any gain.”
I’m a tax paying, joe6p renter saving to buy. My gut tells me that this is a plan that I could live with for several reasons.
-The banks still have to write down the difference between the original loan and the rewrite. Taxpayers are not footing that bill, which is what my main fear is whenever I hear “bail-out”.
-Government is slow, and I’m assuming by “TODAYS market” that the new loan value would be 15% lower than the value at the time of the re-write. I doubt any plan makes it down the pipe before the downward trend we’re in loses a lot of momentum naturally.
-The longer it takes to implement, the less risk there is to the taxpayer. By the time the loans get processed and re-written, the home will have likely already been through a major correction. The home value would have to fall an additional 15% to reintroduce the temptation for an FB to walk away.
If the plan sprouts wings and takes off tomorrow, then yeah, it’ll suck. What are the odds of that, though? If the plan drags through congress and doesn’t take root for 6 months to a year, I think it would be in a better place to succeed without screwing over us savers. Keep in mind also that this only helps, but doesn’t completely solve, 1 part of the equation: foreclosures. 12+ months of inventory still have to be cleared out in addition to foreclosure rates returning to a sane level before the market can bottom.
As several of you have said over and over again, some sort of bail-out is a sure thing. I feel that this suggested plan would be a good compromise that ultimately would cost taxpayers a lot less than a full bailout of banks and FBs, with banks fielding the bulk of the losses as they should be.
One question that remains unanswered from the summary, though, is how a loan would qualify for a rewrite from this program? Are non-primary residences excluded? Does the FB have to qualify (full doc!) for the rewritten loan? If the answer is yes to both of those questions, we might have ourselves a real winner.
