Could 100% Debt Amnesty Solve America?s Economic Woes
The Headline Reads:
April 21st 2011?Obama Administration Grants the American Public ?Full Debt Amnesty?.
Banks are ordered to modify every mortgage loan currently in default to a 30 yr fixed rate mortgage at 5.5% interest and a principal reduction to 110% of ?Current Market Value? for the property. All creditors of unsecured credit card debt ordered to wipe clean all past due debt and penalties accrued returning balances owed to their original value at the time default began, and to restructure repayment terms with an interest cap level set at 11.9%. A structured table for interest rates to vary from as little as 4% depending on credit has been mandated. All homeowners who have been foreclosed on since the decline began in 2006 shall have the foreclosure expunged from their credit records. All bankruptcy settlements from the same date which have failed and were dismissed shall be expunged from credit records.
Is this the answer that turns the housing market and the economy 180 degrees, ?on a dime,? or is it the final straw that the breaks the camels back and sends us screaming into the next great depression?
I say our government ?Of the People and By the People? has Finally made a move ?For The People??instead of for the banks?and this truly is the turn around point for America?s economic turmoil. Are the banks going to take a hit, yes. Are the credit card companies going to as well, yes. Will this cause some to fail and close their doors, maybe. Is that such a bad thing? Don?t think so. It only opens opportunity for the American entrepreneurial spirit to grow and give the little guys who have suffered along with the people a chance to make a real difference in the world by bringing the common sense and integrity our financial markets need. Let them fail we?re tired of them anyway.
Besides do the banks and credit card companies really take that much of a hit?
Having Bankruptcies and foreclosures expunged from the records will only stop the 5 to 10 year delay these people are scheduled to endure before they can begin to improve their credit, qualify for financing?of anything?and once again become productive consumers. Is giving them the instant ability to turn around their lives that have been ruined by the greed and deceit of these institutions going to hurt them in any way? No. It only opens up a whole new group of consumers from which they can feed off of. Wow, this actually greatly benefits them.
What about the Credit Card Debt Amnesty and Principal Reduction Loan Modification Programs, these are going to destroy the banks and credit card companies right?
Again, doubt it. First of all if the loan mods make mortgages affordable to those currently in default on them maybe they suddenly have enough money to resume paying off the credit card debt. Sure for some people there still won?t be enough money to do this. In fact even the loan modification with principal reduction will not allow for everyone to once again be able to afford their mortgage payments. However the vast majority who will benefit, once again becoming productive consumers and can afford to resume making all their payments on time and in full are only going help speed up the overall economic recovery of our nation.
Yeah but the initial Capital/Cash hit the mortgage and credit card companies will take could wipe them out.
This is true but let?s look at where they ?should? be and why this ?should? not be such a big loss for them to recover from.
Credit card companies are getting outrageous interest rates from those who are paying and they were from those who have stopped. 27% interest?outrageous yes but not even the maximum some of these companies are getting?equals $270 for every thousand borrowed??Per Month.? Within four months of loaning $1,000 they have gotten their investment returned ?In Full? with a tiny profit in hand, and large profits to come. Calculate all the payments made before default and they ?should? have such a large surplus that they could easily absorb these losses. Besides they are still going to be collecting on the original balance owed at the time of default, only now at a more reasonable interest rate of somewhere between 4% to 11.9%, so really there is ?No Loss.? They?re still making money! Just a little less.
Aren?t the banks going to suffer losses?
Let?s take a look at a typical mortgage currently in default. It?s probably an adjustable rate mortgage that has surpassed a maturity date increasing the monthly payment to such a large amount the borrower can no longer afford to pay. Example:
A 30 year adjustable at 5% interest for the first 5 years jumping to 7 % for the remaining 25 years?This example is simple and basic, many loans carry a much higher toxicity level than this. Originally the borrower was paying $1,610 per month, and was able to make their payments?struggling maybe?but making the payments. When the loan matured after the first five years their remaining balance due is $275,486. Recalculating this balance into a 25 year loan at 7% interest raises the monthly payment to $1,947. A $337 per month increase. Credit card payments now stop going out and the monthly mortgage payment cannot be met inf full every month. Soon the borrower is in default on both, heading for bankruptcy and/or foreclosure.
Lets say the house goes to foreclosure.
It?s lost 40% in value from the time the loan was issued in 2006. The house is now worth only $180,000. Nobody buys it at auction because they are not going to buy a 180k home for the 275k owed on the loan so the bank takes it back as an REO?Bank Owned Property.
The foreclosure itself cost the bank, conservatively, $25,000. They can resell the property as Bank Owned?Foreclosure?for 85% of current market value, $153,000. Minus the $25k to foreclose and the bank clears $128,000. They scream about a loss of $122,000 (275k still owed minus 128k cleared = 122k loss) right? Wrong. They already collected $96,600 from 5 years of payments plus let?s say 6 months worth of inflated mortgage payments prior to default ($11,682) for a total of $108.282. Subtract the 25k applied toward principle and they have already cleared $83,282. Now add in the 128k from the foreclosure and subsequent REO sale for a total of $211,282. Subtract this from the remaining balance of 275k and they have actually only lost Sixty Four Thousand Dollars. Half of what they claimed. Should we feel bad for them? Okay, but only half as bad as they would lead us to believe we should.
So what happens with a Principle Reduction Loan Modification.
We have already established the bank has cleared 83k in interest from the payments they have already collected, and the remaining balance at the time of default was 275k. With a principle reduction to 110% of current market value the modified loan will be written with a new principle balance due of $198,000 at 5.5% interest with a 30 year (360 month) term, creating a new monthly payment of only $1,124. This is $823 less than the adjusted rate payment of $1,947 and $486 (monthly surplus) less than the original $1,610 the borrower was able to afford. Do you think the mortgage AND the credit cards are going to be paid ?On Time and In Full? every month? I say yes.
Now the bank cleared 83k and wrote a new loan for 198k creating $281,000 guaranteed (virtually) money. Totaling just a $19,000 loss to make this happen. Much less than the $122k they would lead us to believe they lost on the foreclosure and less than one third of the actual $64k loss they would have suffered. Overall a much smaller hit taken, than by what they are doing now!
PLUS, after applying the proper amount to the new principle balance, they will recover this money within 2 years and will once again be putting interest money into their pocket. After just 2 years the remaining balance owed will still be $192,500?only $5,500 applied to principle out of $26,900 collected in payments and the bank is now ahead by $2500?and growing. By the time this loan is paid in full after 30 years the bank will clear a $193,000 profit (404k received in payments minus 198k in principle minus the 19k they started out down after the loan mod). Not too shabby when compared to a $64 k loss?we?re talking about a $257k turn around. Do the big mega banks fail? I don?t think so, but who cares if they do! America?s entrepreneurial spirit has been reborn and the little guys are growing into the new conscientious, responsible leaders of the financial world. I just don?t see how this does not make sense!
Even if these homeowners receiving principal reduction loan mods were to sell their homes within a few years?refinance would probably not be an option as their current 5.5% interest would not be attainable and would only cause an increase in their payment?the banks would at least break even if not turn a small profit. Still a win/win situation
Now let?s take a look at the borrower.
Out of default and once again reported as ?current and on time? to the credit agencies. Credit card companies doing the same. Though they are still upside down on their house within a few years of paying down the principal, watching the economy grow, and their property value slowly climbing, they are now at least even or possibly have equity growing. They have $486 per month surplus of cash for them to live comfortably on, and/or pay down their debt quicker with. Their devastated credit immediately begins to improve making them a stronger more productive consumer with every day that passes. This means instead of buying a frozen pizza or eating left overs, they are going out and buying a pizza dinner for the whole family?spending money within their community. The pizza parlors business is picking up and they must hire more people. Somebody just got a new job, and with the debt amnesty they were granted they now have the ability to grow and improve their credit and become stronger more productive consumers. Within a few years they?ve got good credit and enough money for a down payment on Their New Home. The bank has a new loan with a borrower who can afford to make the payment, and the government is bringing more tax money to pay down the deficit with. The circle of recovery is complete!!
Wait lets go back a minute.
All those defaulted mortgages granted a principal reduction loan mod will no longer go into foreclosure. The shadow inventory of REO property stops growing and actually starts to diminish. Supply begins to work its way closer to demand. Demand begins to grow as supply shrinks and more productive consumers are able to buy again. This begins to drive the housing market upward. Just a few short years and the housing market is not only fully recovered but on the verge of booming again?of course with new limitations in place so as to avoid a repeat scenario.
I?m sure there are plenty out there who will have a thousand reasons why this is ?Crazy Talk, Absolute Insanity,? and ?Could Never Work.? I?d be willing to bet 90% of them would stand to lose money because something like this.
You tell me?Am I Crazy, or Brilliant?
Tell me what you think on my blog at http://www.promero.noteoffers.com
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Article Source: http://EzineArticles.com/?expert=Paul_Romero
Tags: Economy, Fixing, Opinion, Reading ?
Source: http://news-society.co.cc/fixing-the-economy-one-mans-opinion-and-just-good-reading/
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