A newly developed plan, Mortgage Assistance Program (MAP), may provide more help for homeowners facing foreclosure in an economy where there is concern over its rising rate and the assistance being provided to property owners.
Over the past several months many economists, real estate analysts, government officials and taxpayers have commented on TARP and the benefits of the TARP Program.
When TARP was created in 2008, $700 billion was allocated to assist financial institutions in trouble.
As of June 2009, $441 billion was distributed to a number of major financial institutions.
Several of those institutions also repaid $67 billion last month, including $6.5 billion in interest and fees, leaving a balance of $332 billion of unallocated TARP funds.
According to Freddie Mac there are approximately 53 million single family mortgages in the United States as of the 4th Quarter of 2009.
For the same reporting period, approximately 3.185 million mortgages were in a delinquent status, with Wall Street Securitized Mortgages comprising 54.44% of delinquent loans.
Further analysis shows that 1.734 million or 21.68% of all loans securitized by Wall Street are delinquent compared to 6% overall.
If the securitized mortgages are removed from the equation, only 3.22% of mortgages are delinquent with Ginnie Mae (6.3%) and Banks (4.96%) having the highest rates as a percentage of loans outstanding.
Given that TARP has excess funds available and the economy, or more importantly the taxpayer, deserves some direct assistance, attention should be given to the newly proposed Mortgage Assistance Program (MAP).
Under President Obama’s new approach, property owners should not be removed from their homes, but permitted to stay and pay rent.
If someone is able to pay rent, then that same person should be able to make a mortgage payment if structured correctly.
Instead of a rental payment, let the homeowner make the payment toward the mortgage and have the government cover the difference in a mortgage assistance program which can be repaid over time.
The government is providing an $8,000 tax credit for first time homebuyers, so why can’t they assist the current homeowner with part of their existing mortgage payment and allow the borrower repay them in the future?
For example, Mr. and Mrs. Z have a mortgage payment of $1,170 ($200,000 loan with 30 year payout at 5.75% interest).
They lose their jobs and can only make a $470 payment, so the government steps in and pays the $700 difference.
This allows the Z’s to remain homeowners while they work to get back on their feet.
Ten months later, the Z’s are in a better financial position so the government arranges a repayment plan for the $7,000 they loaned the homeowners that will start in seven years and last for 10 years at an interest rate of 3%.
What the government provides is assistance to the property owner (just like the bailout plans for the Financial Industry and Automotive Industry) and requires them to pay back the obligation starting in seven years.
Franklin Roosevelt called it Lend Lease. It is not a handout. It is short term government assistance.
A significant benefit of this program would be that it would allow payments to resume to financial institutions and cash flow to get back to normal levels, thus improving credit availability.
Also, property values would stop declining and have a short recovery period to adjust for the liquidation values of the past nine months, thus restoring equity to many property owners and having fewer homes under water.
While the program may not be perfect, it could assist a lot of people who want to own homes.
Most importantly, it would be channeled directly to the property owner, not a large corporation that has other motives besides keeping the property owner solvent.
Some conditions of eligibility would include verification of gross income via income tax statements, confirming employment and confirming current payroll.
The only people who would be excluded from the program are those who own multiple properties and cases where mortgage fraud exists in the form of straw buyers and invalid sales.
Some conditions and limitations would be implemented as well.
For instance, the total government assistance would be capped at $50,000 per homeowner and would run for up to 36 months.
The government would release the funds over 12 months, thus the federal outlay would be limited to $25,000 per homeowner in a given year.
The total cost of 10 million loans receiving assistance would be $250 billion per year or $500 billion in total (current TARP has over $300 billion available).
This would be more cost effective than the TARP bailout because the banks that needed TARP Funds will become more stable with improved cash flow and a reduction in non-performing loans, thus allowing TARP funds to be paid back and used to fund MAP.
Funds would need to be paid back starting within seven years, or sooner if possible, with no impact on an individuals’ credit score.
One obstacle to overcome would be to obtain the assistance from MAP quickly enough in order to avoid loans from defaulting and having individuals lose their homes.
In order to do that, applications would be submitted on-line or through an IRS related system whereby an accountant submits income tax statements, and current payroll documentation as third party validation.
The lending institution would be required to take a partial payment from the consumer and submit the balance due to the Treasury for payment.
Another difficulty with implementing this program would be processing and accounting.
Loan servicing companies would need to add staff. If one servicer would be able to process 50 applications a week, 4,000 servicers and additional support staff would need to be hired.
Ramping up and training personnel would take time, but as many as 10,000 new jobs could be created, several million homes would not fall into foreclosure and more jobs would not be lost due to desperate situations.
Can it work? The reason it possible and it can work is because real estate goes through cycles.
If people are forced to sell at liquidation prices, everyone loses, but if you allow property owners to have a chance to get back on their feet and get back to work, the whole economy would start to turn around.
MAP may not be a perfect solution and many will complain about the injustice. But think about the injustice of the corporate bailouts, the injustice that first time home buyers get a break, the injustice that shareholders come before the individuals who created value in the companies by buying products.
One can go on and on, or we can try. We only fail if we do not try.
By John Watch