To those who emailed my blog last week to the White House — apparently, someone there was actually listening!
Five days after my article detailing my solution to cleaning up the housing market, there was an article in the New York Times citing my exact proposal. It’s reported that President Barack Obama is weighing a plan to allow homeowners to refinance their mortgages to reduce hefty interest payments.
That was part one of my three-part solution. Part two, detailed below, is admittedly the most complex yet most integral part of the biggest problems facing the U.S. economy — the dismal housing market, the millions of underwater homeowners, and the demonization of the banks.
It’s clear that confidence and stability needs to return to the housing market. With that in mind, the following resolution would help everyone involved.
Mortgage stakeholders, including investors, have putback claims against the five largest lenders: Ally, Wells Fargo, Bank of America, Citigroup and JP Morgan.
Also, state and federal governments want to be reimbursed, along with local county governments who want to be reimbursed for lost recording fees.
We all also have many homeowners who are underwater.
The reason there is no settlement is because the various agencies want to continue to demonize the banks and financial institutions for their past sins, and everyone wants to collect money that is simply not available.
The institutions could easily tie this up in litigation for 10 years, so obviously a compromise needs to be brokered by the Treasury.
With that in mind, this is my proposal. The key aim should be to compensate the people who have suffered the most — the poor homeowner who has paid his mortgage faithfully but cannot sell his home because prices have dropped well below what he owes.
The banks, as part of the settlement, should reduce the principal of all underwater mortgage holders by certain percentage. What percentage that is needs to be negotiated, but the key is it allows many people to sell or refinance their homes.
This frees consumers from the burden of overbearing debt, and would provide a palpable economic stimulus — much more than simply handing money over to banks and letting them park it in U.S. Treasurys, as has been happening with stimulus funds.
As part of the agreement, governmental entities agree to reduced amounts on their claims in return for getting the money ASAP, and the putback claims get settled in a way that no one can challenge the decision in court.
The banks will get certainty receive immunity from further lawsuits after this settlement, which is important as well, because it’s necessary to allow these integral institutions to heal.
Who will be against such a deal? Many homeowners who are not underwater may feel this isn’t fair. And many politicians who want to continue earning points with their angry constituencies by demonizing the financial sector will think the settlement is too lenient on banks.
But as a country, we need to put this terrible crisis behind us. And I believe there will be tangible benefits to be had.
In the aftermath, almost every homeowner’s property will increase in value, everyone involved now doesn’t have to wait for money they feel they’re owed, and banks can go back to back to the business of loaning money without having to hold huge amounts of cash in reserve for future claims.
Let's hope the president contemplates this one the way he considered last week’s proposal.
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