A Solution That Works

by | BiggerPockets.com

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…


  • 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


  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


  • 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 .

About Author

Joshua Dorkin

Joshua Dorkin is a serial entrepreneur, investor, podcaster, publisher, educator, and co-author of How to Invest in Real Estate. He started BiggerPockets to help democratize the real estate investing landscape for himself and others, aiming to make it accessible for everyone, regardless of income or education. Today, BiggerPockets is the premier real estate investing website online with over one million members and reaching over 70 million people with the message of financial freedom through real estate investing. Joshua, along with his wife and three daughters, make their home in Denver, Colorado, and spend any time they can traveling, exploring, and adventuring. Read more about Joshua’s story in 5280 and Inc.com.


  1. Michael Rossi on

    I think this is a TERRIBLE PLAN! The homeowners that bought more house than they could afford or accepted loan terms that they could not afford should be foreclosed upon and lose their homes. The companies that gambled by purchasing worthless paper should be allowed to fail and go out of business. Companies and executives that engaged in fraud should be prosecuted to the fullest extent of the law and appropriate executives sent to prison.

    I’m sick of the bailouts!!! Let’s let the free market work and allow the chips to fall where they may!


  2. Robert Simpson on

    Your plan does not take into account that the current inventory of REO’s will force home prices to continue to fall for the next six months to a year. Any plan that does not reduce current inventories in a rapid manner will fail as home prices are leveraged at 25:1 on the banks books.

    There is alot of money waiting to acquire these assets once the servicers will sell them in bulk at rates that allow a good business plan to be profitable. Tax insentives can be used to convert the majority of these into rentals taking them out of the market place.

    Reducing the inventory must be a major part of any plan. On that basis alone, your plan has 0% chance of success.

  3. ** 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%.**

    For one of the hardest hit states (CA), the current median home price is $650,000 x 1.5% = $9,750 (cost of interest rate buydown).

    ** The lender/servicer has a one-time chance to write off any negative equity and receive two times the normal write-off. **

    Let’s assume the negative equity on the median home above is 30%.

    650000 / .7 = 928500 (original loan amount)
    928500 – 650000 = 278500 (write off)

    278500 (write off) + 9750 (buydown) = 288250

    We’re up to nearly $300,000 loss on each median priced home in CA. I don’t know how many such homes there are, but only 100,000 would cost $30 billion. That’s for CA alone. What about other high cost states?

    As for Robert Simpson’s idea–“there is a lot of money waiting…”–any bailout is not for investors/landlords to scoop up houses at bargain prices.

  4. SoCalGal, it’s too bad you have to register for his email newsletters to get the info. Can you cut and paste?

    Let me start by saying I don’t like any bailout but…

    The mandated interest rate reduction was proposed on the forum site and it got shot down, too so don’t feel bad. However, to be more equitable I would extended it to anyone who wants it. There are a lot of homeowners who have fixed loans above 6.375% and are having a hard time. I also think some sort of principle-reduction plan would work if, upon the homeowner selling the property, the bank is reimbursed some or all of the reduction if there’s a profit. It would give homeowners relief while they live there but they wouldn’t benefit if they sell before the market turns around. And I don’t really see what’s the difference between owner-occupied or investment properties/second homes. A foreclosure is a foreclosure/a bad loan is a bad loan. It would be almost impossible to know if an owner is truly living there.

    We have all witnessed how poorly banks have “attempted” to voluntarily help homeowners over the past year so it’s time for mandates if they want any federal money.

  5. halina mitchell on

    As long as we do nothing about prevailing lending practices and do not reform them, the bailout is just another bandaid.I would like to see two appraisals ordered for each sale.All eligible appraisers should be on a rotating list.Contract price should not be revealed.Appraisers must be within a 5% spread.Those appraisers who are out of spread more than 10 times in a year will have to be dropped for a year.We won’t get all these inflated values that are being made at lenders request.

  6. Wait…was Quicken loans one of the culprits that promoted the loans that are now the problem? The damage is done. A market correction is in process. The redistribution of wealth goes on. While asset managers do their best to provide property preservation to protect the asset from further decline, investors are spending big bucks buying up these non performing assets with cash. These assets are getting fixed up, labor is being paid, materials are being purchased and in my area they are often resold in move in condition. The long drawn out foreclosure process is what is allowing these devalued assets to go further south. Reduce the red tape and wait time of legitamate foreclosures so that they can be resold to credit worthy buyers. The money recovered from the sale can be used to fund new mortgages. We learned a lesson in 9/11, dont let fear create hasty decisions. In this time of uncertainty, we are pumped daily with images of fear. “Be afraid, be very afraid!” But as a foot soldier in this battle, I see great things happen in the free market. Homeowners that should not have been homeowners are being exposed. Those who decided to skip the crucial step of a starter home are now learning the lesson of why you start with a starter home and work their way up from equity and experience. Tis better to buy less than you can afford with a potential upside than to jump into the home of your dreams just because you can. The rainy day does cometh. Lenders are offering generous loan modification if only these delinquent borrowers would stop hiding and call. We all know that this method will just postpone the enevitable. Even after generous loan modifications, many default again or worse use the tactic to squat in this ill gotten home even longer. As long as people are getting older, making babies, getting divorces there will be a healthy need for housing. The market will rise to fill this void. Soon I hope, we will have many of our military returning who will be purchasing homes. My advise, go back to the old fashioned concept of a starter home for your first purchase. Its not where you will be living in 30 years. Its not how much you make, its how you spend what you make that sets the rich and poor apart.

  7. having gilbert speak on this issue is like having frank lucas (american gangster) going around harlem and handing out methadone. as sarah palin would say thanks but no thanks. josh try getting someone like rouibini to write a rescue plan for you, not the ceo of quicken, the greedy bastards that screwed everyone in the first place….

  8. Michael Rossi on

    “Wait…was Quicken loans one of the culprits that promoted the loans that are now the problem?”

    Exactly right!!! Here’s my plan – let these companies that wrote all the bad loans pay for the damage they’ve created and send the executives to prison!


  9. We should learn from the past:
    This crisis is just like 1873: the real big depression.
    When housing boomed and fell (Europe) and the railroads went broke (US). http://tinyurl.com/3gp6a9

    The result was a shift of financial power from Europe to the US.
    Now the power will shift from US to India, Middle East, China?
    – AMD partly in Abu Dhabi hands
    – Citigroup back office bought by Tata (India)
    Who will be next?

  10. As far as I see it, lending practices have been way to lax. I remember hearing one particular lender about a year ago or so advertising on the radio here in Michigan. I’m not going to say who but it is a huge lending company.

    They were giving out loans like candy to kids at the store. Now, here we are. The best part is that the people that got us into trouble, including the gov., are now trying to fix it. Interesting?

    The worst part about all of this is that real estate investors and agents have an extremely hard time gaining trust and credibility from people. The past few years have ruined it for them.

    I wrote a post on my blog about it and created a contest to help each other out. People have been commenting on it and coming up with some great ways to improve credibility and trust. The contest ends tonight but the prize is still there.


  11. How about a plan for all those people who were actually responsible? If you bought a house that you could actually afford, used a down payment and acquired a home using a mortgage that you actually were able to qualify for without gimmicks, then your loan will be forgiven. Probaly wouldn’t have very many people qualify for that. Instead we reward those who were totally irresponsible, but this is an election year and the slime in Washington need votes. It’s disgusting. The inmates truly are running the asylum when a plan like this could even be proposped. What happened to this country?

  12. Why not just add the unpaid portion to the balance of the loan, yes, like a neg am, only fixed, and perhaps amortize over 35 years.

    This would cost the taxpayers nothing, and could be offered to all mortgage holders and homebuyers as a new product.

    Can I have a spa treatment?

  13. I like the plan except for one part. Why should the government subsidize the difference between the temporary interest rate and the final interest rates. Banks who wrote the loans should take this loss. They didn’t and don’t need the government to do this. Banks were just too arrogant to admit their screwups thus turning a small loss into a catastrophy.

  14. I’m reluctant to support ANYTHING that

    a) Bails out home owners in default– 70% of whom LIED on their application to get the loan, and 5 million of whom are in this country ILLEGALLY and thus committed document fraud, identity theft, or some degree of both in conjunction with mortgage fraud to obtain loans.

    b) Bails out lenders who made the aforementioned loans

    c) Bails out share owners of the above who during the good times counted their private profit gain and who now want to socialize their losses.

    d) Bails out financial institutions that purchased mortgage backed securities, derivatives, and other instruments backed by shaky loans

    e) Relieves retirees who blindly trusted others with their money, and who should be paying closer attention

    f) Shifts the focus from those responsible.

    The aforementioned plan does all of the above. In short, there’s absolutely NO justification for using the Treasury of the United States to fix this. Sooner or later we’re going to eat this. This trillion dollar tinkering is just kicking the can down the road. The next big bankruptcies are Social Security and Medicare. The government has been borrowing from these programs for years– using the borrowed funds to mask the true size of the Federal Deficit and debt. Forgive me if I find this proposal as self-serving as the other government bailout ideas.

  15. It should be further noted that the only reason we’re having this conversation is because of what can only be labeled judicial malpractice on the part of the Supreme Court during the last major economic crisis of our time under Hoover / FDR.

    The specific malpractice I’m referring to is the deliberate misinterpretation of the so-called “General Welfare” clause in the Constitution. Most Americans are completely unaware of the fact that the highest law in the land– the law upon which all others rest– is The Constitution. And that most of what Congress does today– including the “social programs” spending that comprises 65% of the multi-trillion dollar Federal Budget– is NOT AUTHORIZED by the Constitution.

    We got these programs, bailouts, individual & corporate welfare, and myriad other spending and spending proposals because the Court once upon a time for political expediency liberally interpreted the words “general welfare” broadly and without regard for their original intent / meaning.

    James Madison, the undisputed “Father of The Constitution” had this to say concerning “general welfare”: “With respect to the two words “general welfare,” I have always regarded them as qualified by the detail of powers connected with them. To take them in a literal and unlimited sense would be a metamorphosis of the Constitution into a character which there is a host of proofs was not contemplated by its creators. If the words obtained so readily a place in the “Articles of Confederation,” and received so little notice in their admission into the present Constitution, and retained for so long a time a silent place in both, the fairest explanation is, that the words, in the alternative of meaning nothing or meaning everything, had the former meaning taken for granted.”

    and, In 1794, when Congress appropriated $15,000 for relief of French refugees who fled from insurrection in San Domingo to Baltimore and Philadelphia, James Madison stood on the floor of the House to object saying, “I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituents.”


    “Congress has not unlimited powers to provide for the general welfare, but only those specifically enumerated.”

    With this bailout the only truly free nation on earth has capitulated. The worst part is that we traded our Constitution for a solution that isn’t even going to work. Global hyper-inflation is next. Total economic collapse follows that.

  16. There is a lot of money waiting to acquire these assets once the servicer s will sell them in bulk at rates that allow a good business plan to be profitable. Tax
    Incentives can be used to convert the majority of these into rentals taking them out of the market place.

  17. Mike Henderson on

    There is another link under the Bigger Pockets website under Bigger Pockets http://themortgageinsider.net/mortgage/interest-only-mortgage-hucksters-compound-mortgage-crisis/

    Makes for a good read about Quicken Loans.

    The final thing about his plan that strikes me as odd or wrong. He proposes three types of mortgages. The first one is ARM’s with no cap. I’m a mortgage broker and I’m not aware of any ARM’s that I can sell from banks that don’t have caps. If I’m wrong on this please let me know.

    To have no cap it must be a private party or owner carry. Then it gets back to the moral hazzard issue.

  18. Rescuing the Bailout
    A Real Estate/Mortgage Broker’s perspective… (excerpt from a article I wrote)

    Stabilizing housing prices is widely accepted by most economists as the best way to solve the lingering recession and potential depression. Using the same $700 billion dollars, most of the current and pending foreclosures in the country could be avoided utilizing more practical rather than political strategies. If the past is prologue, by funding a Homeowners Refinance Act, similar to the one used during the Great Depression, we could multiply the effectiveness of the current Bailout Plan. However, this time mortgages could be made to homeowner’s in a subordinate lien position.

    For example, banks could be given a profitable alternative to foreclosure by modifying the amount of their nonperforming mortgages to 80% of the properties current value with a new manageable fixed rate and payment terms. The incentive would be realized by distributing a 10% cash payoff to any existing lien holders in exchange for a 20% lien on the homeowner’s property. As a former mortgage and real estate broker that currently negotiates discounted mortgage payoffs, I can confidently say that most banks would prefer this strategy to foreclosure.

    Simultaneously attacking the growing surplus of available homes, similar lending standards could be available to individuals interested in purchasing a home. The underlining political dilemma of making this “bailout” fair and profitable could be presented in the following manner: Participating individuals would lose their ability to receive tax credits for the interest paid towards their primary mortgage. Instead, that amount would be credited towards the 20% lien held by the government. With the average mortgage being less than $250,000, over 20 million homes could be saved or purchased using the same $700 billion. Systematically, this would significantly lower mortgage payments, increasing household cash flow, thus directly stimulating the economy through more consumer buying power.

    Increasing real buying power as opposed to the borrowing power that some economic strategist call “tackling the credit freeze”, is a better long-term approach to maintaining a productive economy.

    After acknowledging that the major investment banks who masked these mortgage-backed securities for so many years have either failed or converted to more regulated entities, the inappropriately inflated investor confidence is the only other major intangible deficiency plaguing the current financial crisis. The Bailout appears to be more focused on re-inflating that confidence than dealing with the catalyst causing the deflation. By identifying better alternatives, it is fair to say that the timing, magnitude and methodology of the Bailout Plan do not proportionately reflect its intended objective of immediately stabilizing the economy.

  19. This is a time of crisis that must be met with a cool and level head and no more business as usual based soley on greed. There is a solution which will help some without the bailout called temporary seller financing.

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