A Solution That Works

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Today, we’ve got an important guest post to share, written by Dan Gilbert, Chairman of Quicken Loans.

Last week, President Bush signed into law the hotly debated financial rescue package called the Emergency Economic Stabilization Act of 2008. While this legislation helps stabilize Wall Street and the banking system, it does nothing to address the root problems of the housing dilemma that is at the core of the financial crisis. High foreclosures, adjusting ARMS, rapidly falling property values and an oversupply of housing have combined to form a housing market “death spiral”.

Frankly, the $700 billion government bailout isn’t enough to solve the downward spiraling housing market. The country needs more. The current legislation does nothing to address the homeowner. Our nation’s financial recovery must begin at home with the homeowner. Enacting measures that keep homeowners in their homes is the only real way to stem our financial crisis. That’s where A Solution That Works comes in. I’ll summarize the main points of the plan here, but I truly hope that readers will visit the site (www.asolutionthatworks.com) to read the entire plan and give your input, or check out the Choose Thinking blog. Then, if you agree with the solution, please share it with your friends and family, and your representatives in Congress. This is something that will benefit millions of people.

So, here are the main points you’ll want to know about A Solution That Works…

THE PROBLEM:

• At the core of the financial crisis is the housing crisis, which needs to be addressed.
• Stabilizing Wall Street and the banking system is only a start. The current bill does not forestall the tide of foreclosures that are to come.
• Adjusting ARMS, high foreclosures, low property values and an oversupply of housings have combined to form a “death spiral” in the housing market
• The $700B bailout does not address this. That plan (i) doesn’t address how prices will be set for the loans (ii) causes unfair results for borrowers who have dutifully made their payments (iii) is potentially extremely expensive for the taxpayers (iv) will take a long time to have an impact (v) doesn’t address the root cause of the messed up housing market

THERE IS A SOLUTION THAT:

1. Keeps homeowners in their homes with fixed affordable amortizing monthly payments
2. Costs the tax payers a fraction of the cost
3. Stabilizes prices and stops free fall in home values
4. Gives investors higher odds of recovering their investment in these loans/securities vs. expensive foreclosure and resale in declining spiral of housing market

HOW:

• Focus on specific types of loans, each of which must be owner occupied: (i) ARMS with no caps (ii) Option Arms (iii) interest only loans.
• Require servicers of these loans to reset the borrower’s rate to 6.375% fixed with a 30 year term/amortization. But the borrower only pays 4.875%; thus, government pays/subsidizes the difference between 6.375% and 4.875%.
• Over the ensuing 6 years, gradually raise the rate the borrower pays and lower the amount of the government subsidy until year 6, when the borrower pays a rate of 6.375% for the remaining term of the loan.
• The lender/servicer has a one-time chance to write off any negative equity and receive two times the normal write-off
• All prepayment penalties on these loans are voided
• Homeowners get the benefit of lower payment for the first 5 years, and then a low fixed rate for the next 25. They get to keep their homes. Their homes values (and neighborhoods) stabilize.
• Lenders are in a much better position than if they had to forecloses on these borrowers, and the stability this brings to the housing market helps them with their REO’s
• Taxpayers receive benefit because this costs an estimated $50B spread over 5 years– a fraction (1/14th) of the cost of the $700B plan

Under this plan, everyone benefits. Homeowners with troubled mortgage loans (ARMS, OARMS and Interest Only) have a lower payment for the first 5 years, and then a low fixed rate for the next 25. They get to keep their homes. Homeowners who have been responsible in their mortgage choices and payments also experience a more indirect, but no less valuable benefit as their homes’ values and neighborhoods stabilize and eventually appreciate. Lenders find themselves in a much better position as well.

Implemented correctly, this plan would help rapidly stabilize the housing market. It would significantly reduce foreclosures, stabilize home prices and allow millions of American homeowners to work their way out of “upside down” financial situations that continue to perpetuate our downward spiral. And at a fraction of the $700 billion dollar cost.

If you think this sounds like a proposal you could get behind, check out the site asolutionthatworks.com or head to the blog http://choosethinking.com/ for more details.

For more media coverage about A Solution That Works, check out this article in the Detroit Free Press or this interview with WJR Radio in Detroit .

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.