Thursday, January 15, 2009

Housing Student Loan Program

We've been kicking this one around the office this morning, so I thought I would put it out here to see if we can't get some more smart people to help us smooth this idea. What Congress should do with the next batch of magical federal dollars is create a Housing Loan program based on the Student Loan program. People would have to apply to get their chunk of the federal pie each year and the loans would be based on need. Each year they would have to either apply for more aid, start paying the loan back, or prove need to differ for another year. You could cap the maximum amount at some outrageous number and garnish the wages to get the money back. This would be a win/win situation because it would keep people in their homes, which would stabilize the free falling housing market and we would have a reasonable expectation of getting our tax dollars back at some point.

Would this help the truly unworthy mortgage holder, probably not and would it help the greedy, no. Would it help the average Joe that bought a house and because the market went South is now stuck, yes.

To bring this to light a little better I will try to show an example. Joe buys a reasonably priced home for $250,000 with a monthly mortgage of say $2000 (just a rough number probably lower). Joe makes $50,000 a year and has a wife and a couple of kids. He bought the house through creative financing and its current market value is say $200,000. What is Joe to do? Is he going to walk away or stop paying, so there is another empty house driving the market down? Or is he going to apply for this spanking new program that based on his need and ability to pay says that he can reasonably pay $1500 a month for his mortgage and that the other $500 will come in the form of a low interest loan. So, this year Joe and his family receive $6,000 from the government to make his mortgage payments and keep him out of foreclosure and in his house. Next year, Joe needs less help because the housing market has stabilized and his house is still worth $200,000, but Joe is assessed to need only $400 a month to meet his mortgage, so he only gets $4,800. The next year the housing market is doing better and his house is worth $225,000 and Joe is doing better and doesn't qualify for mortgage assistance, but he isn't able to start paying back just yet. The next year the house is still not fully recovered, but the market is strong and Joe is doing okay and doesn't need a thing, plus he can start paying back the money that his fellow taxpayers fronted him. He isn't paying much, but five years later his federal loans are paid off and he is doing great.

I know you say what if he sells, well if he takes a loss then he can finance the loss because that is life and somethings just plain suck, but his interests on that will be low and he will have to pay it back based on ability. If he makes a profit then it would go to paying off his mortgage and then his federal loan. You see how this works, we front the guy the money to stay in his house and he pays us back when he can. Does this mean that everyone will qualify or that we will get all our money back, no but it is better than what is happening now and it makes better sense then letting house after house go empty driving the market further and further down. Does it suck if Joe sells and still has to pay off the balance, sure but where does it say that things will never suck? If I wreck a brand new car and I don't have replacement or I was upside down, I still have to pay for the wreck after it is scrap metal, so why is a house any different?

I want to hear what you have to say because your government wants to keep throwing your money at the bankers hoping they can stop the flood. Give details and specifics on how to make this better and I will send it to my Congressman and Senators.

2 comments:

  1. There is only one solution to the current housing problem:

    Prices must decline so that Jose and Jane Sixpack can afford a house on their income.

    I understand using the Student Loan program as a template, but this just pushes the day of reckoning when the actual price of the house will be realized.

    I'm a chemist, not an economist, so what do I know?

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  2. I understand what you are saying, but much like the respected Ben Stein I say when in a hole put down the shovel. We need to do something to stop the bleeding in the housing market, so that things will stabilize. This allows more people to stay in their homes and gives America some hope that they aren't throwing their money down the drain on Congress' pet projects that does zero to help.

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