Mortgage rescue and foreclosure solution plan
In light of the recent announcement of Bank of America and President Obama to reduce principal on mortgage debt I thought I would re-publish my original blog from 2008 concerning this matter. It is also significant that I sent this open letter to the heads of the five major lenders in 2008 as well.
November 6, 2008
Re: mortgage rescue plan and foreclosure solution
Dear Lending Institutions;
In the recent election voters were polled prior to voting and asked what character qualities were first and foremost in determining their elected representatives. The top two choices were honesty and leadership. Those top two characteristics were named in another poll as most lacking in our current leaders. In the attached mortgage rescue plan a very simple process used very often in municipal loans can solve the mortgage crisis, bring an end to the foreclosure dilemma, and return trust to our banking institutions by providing honesty and leadership.
The outline of the plan is to announce publicly that all institutional home loans will be cut by a minimum of 10% immediately and the current payments will be recast reflecting the new principal. The percentage reduction amount will be put into a five-year subsidy or “set aside” mortgage. The benefit to homeowners will be stated in the subsidy mortgage that if the mortgagor makes every payment on the reduced principal first mortgage on time and without fail, each month for five years, then the subsidy mortgage will be forgiven in full.
This will create an incentive to reward good behavior instead of punishing bad behavior.
Liquidity to the bank will increase immediately and dramatically because all loans will be on time and in full. The lower payments reflected in the lowered principal will allow mortgagors previously relegated to the ranks of foreclosure to stay solvent and in their own home. This will promote honesty because the lower market value reflected in today’s home values is at least 10%, so by reducing the principal the bank is merely reflecting the actual market valuation on it’s secured collateral.
Imagine being the first lender to announce on public television to 300 million Americans a plan to cut it’s mortgage base because it wants to lead the way out of the crisis and promote an honest and value driven solution to homeowners problems. The public relations generated by the good will of the act will demand that other lenders follow suit.
And even if they didn’t, the financial direction of your institution will be secured by future Depositors.
The mechanics of the program are very simple since the existing loans could be modified internally without need for closings or title searches or additional fees. The subsidy mortgages could be handled individually with a last owner search and new note/mortgage combination recorded in bulk.
What about owners who sell their home prior to the 5 years? Both liens exist as recorded debts and become due. For each full year an individual has paid their mortgage payments on time they get one year off of the subsidy mortgage. If someone sells their house after year 3 is over they owe the balance on the principal loan and two-fifths of the remaining 5 year subsidy loan to be paid from proceeds at closing.
What about assignments of mortgage? Normally assignments of home loans don’t occur, but if they did, the assumption would require the hypothecation of both debts to the new lender.
What would be the result of an additional default by the borrower? Both the principal loan and the subsidy loan would cross default and subsequently become due and payable and a regular foreclosure would occur.
What about refinancing? Again, the debts are of record and they would reflect the loan to value debt underwritten by either the existing bank or any new lender.
The mechanics can be refined and the percentages can be adjusted to reflect actual reductions necessary to allow borrower’s to recast their payments depending on the reduction in market value by area or region. The principal is sound and often the simplest solutions are the best. I am a regular working guy who happens to have worked in the title insurance, mortgage, property management/development business for decades and I see the need for someone to take the leadership role with honesty and integrity to solve this ever-widening crisis. Imagine it could be you.
William S. Janhonen