Fixing the Economy: One Man’s Opinion and a Good Read

Could 100% Debt Amnesty Solve America’s Economic Problems?

The headline says:

April 21, 2011 – The Obama administration grants the American public a “total amnesty against debt.”

Banks are instructed to convert all currently delinquent mortgage loans to a 30-year fixed rate mortgage with 5.5% interest and a principal reduction to 110% of the property’s “Present Market Value”. All creditors of unsecured credit card debt were ordered to eliminate all past due debts and penalties increased the returned balances owed to their original value at the time the default began and to restructure payment terms with a cap level. interest rate set at 11.9%. A structured table has been required so that interest rates vary from just 4% depending on the credit. All homeowners who have been foreclosed on since the decline began in 2006 will have the foreclosure removed from their credit records. All bankruptcy settlements from the same date that have failed and were dismissed will be removed from the credit records.

Is this the answer that spins the housing market and the economy 180 degrees, “on a dime,” or is it the last straw that camels are coming back and sending us screaming into the next great depression? ?

I say that our “Of the People and by the People” government has finally made a “For the People” movement, rather than for the banks, and this is truly the turning point of America’s economic turmoil. Are the banks going to take a hit? Credit card companies will too, yes. Will this cause some to fail and close their doors, perhaps? That’s too bad? I do not believe it. It only opens an opportunity for American entrepreneurship to grow and give young people who have suffered alongside the people the opportunity to make a real difference in the world by providing them with the common sense and integrity that our financial markets need. Let them fail, we are tired of them anyway.

Also, are banks and credit card companies getting that much of a hit?

Removing bankruptcies and foreclosures from the records will only stop the 5-10 year delay these people are programmed to endure before they can begin to improve their credit, qualify for financing — of anything — and a once again become productive consumers. Is giving them the instant ability to change their lives that have been ruined by the greed and deception of these institutions going to harm them in any way? No. It just opens up a whole new group of consumers that they can feed on. Wow, this really benefits them immensely.

What about credit card debt amnesty and principal reduction loan modification programs?

Again, I doubt it. First, if loan modifications make mortgages affordable for those currently defaulting on them, they may suddenly have enough money to resume paying off credit card debt. Surely for some people there still won’t be enough money to do this. In fact, even a principal reduction loan modification will not allow everyone to repay their mortgage payments. However, the vast majority of those who will benefit will once again become productive consumers and can afford to resume all payments on time and in full, will only help accelerate our nation’s overall economic recovery.

Yes, but the initial Principal / Cash hit the mortgage and the credit card companies could kill them.

This is true, but let’s see where they “should” be and why this “should” not be such a big loss for them to recover.

Credit card companies are getting outrageous interest rates from those who pay and were the ones who stopped. The 27% interest, outrageous, yes, but not even the maximum that some of these companies obtain, is equivalent to 270 dollars for every thousand borrowed, “per month.” Within four months of borrowing $ 1,000, they have made a return on their “Total” investment with a small profit on hand and big profits to come. Calculate all the payments made before default and they “should” have such a large surplus that they could easily absorb these losses. Also, they will still be collecting the original balance due at the time of default, only now at a more reasonable interest rate of between 4% and 11.9%, so there is really no loss. They are still making money! Just a little less.

Won’t the banks suffer losses?

Let’s take a look at a typical mortgage currently in default. It is likely an adjustable rate mortgage that has passed a due date, increasing the monthly payment to such a large amount that the borrower can no longer pay. Example:

A 30-year adjustable to 5% interest for the first 5 years jumping to 7% for the remaining 25 years: this example is simple and basic, many loans have a much higher toxicity level than this. Originally, the borrower paid $ 1,610 per month and was able to make his payments, perhaps with difficulty, but still making the payments. When the loan matures after the first five years, the remaining balance owed is $ 275,486. Recalculating this balance on a 25-year loan at 7% interest increases the monthly payment to $ 1,947. An increase of $ 337 per month. Credit card payments now stop going out and the monthly mortgage payment cannot be fully met every month. Soon, the borrower defaults on both, heading for bankruptcy and / or foreclosure.

Let’s say the house goes to foreclosure.

It has lost 40% of its value since the loan was issued in 2006. The home is now worth just $ 180,000. Nobody buys it at auction because they are not going to buy a 180k house for the 275k owed on the loan, so the bank recovers it as REO – Bank Property.

The foreclosure itself cost the bank, conservatively, $ 25,000. They can resell the property as bank property – foreclosure – for 85% of the current market value, $ 153,000. Minus the $ 25k to foreclose and the bank clears $ 128,000. They scream about a loss of $ 122,000 (275k still owed minus 128k settled = 122k loss) right? Wrong. They’ve already raised $ 96,600 from 5 years of payments plus say 6 months of inflated mortgage payments before default ($ 11,682) for a total of $ 108,282. Subtract the 25k applied at the beginning and $ 83,282 has already been settled. Now add the 128k from the foreclosure and subsequent REO sale for a total of $ 211,282. Subtract this from the remaining balance of 275k and you’ve actually only lost sixty-four thousand dollars. Half of what they claimed. Should we feel bad for them? Okay, but only half of what we would be led to believe we should.

So what happens to a downgrade loan modification?

We have already established that the bank has settled 83k in interest on the payments they have already collected, and the remaining balance at the time of default was 275k. With a principal reduction to 110% of the current market value, the modified loan will be issued with a new principal balance due of $ 198,000 at an interest of 5.5% with a term of 30 years (360 months), creating a new monthly payment of only $ 1,124. This is $ 823 less than the adjusted rate payment of $ 1,947 and $ 486 (monthly surplus) less than the original $ 1,610 the borrower could afford. Do you think mortgage AND credit cards will be paid “on time and in full” every month? I say yes.

Now the bank cleared 83k and issued a new loan for 198k creating $ 281,000 guaranteed (virtually) of money. Totaling only a loss of $ 19,000 for this to happen. Much less than the $ 122k they would have us believe they lost in foreclosure and less than a third of the actual $ 64k loss they would have suffered. In general, much less of an impact than what they are doing now.

PLUS, after applying the appropriate amount to the new principal balance, they will get this money back in 2 years and put interest money back in their pocket. After just 2 years, the remaining balance due will still be $ 192,500, only $ 5,500 applied at the beginning of the $ 26,900 collected in payments and the bank now has a $ 2,500 lead, and it’s growing. By the time this loan is paid in full after 30 years, the bank will make a profit of $ 193,000 (404k received in payments minus 198k in principle minus the 19k that started after the loan modification). It is not bad at all compared to a loss of $ 64 thousand, we are talking about a change of $ 257 thousand. Do the big megabanks fail? I don’t think so, but who cares if they do! America’s entrepreneurial spirit has been reborn and the little ones are becoming the new conscientious and responsible leaders of the financial world. I don’t see how this doesn’t make sense!

Even if these homeowners receiving principal reduction loan modifications sold their homes within a few years, refinancing would probably not be an option, as their current 5.5% interest would not be achievable and would only cause an increase in their payment; Banks would at least break even if they didn’t make a small profit. It’s still a win-win situation

Now let’s take a look at the borrower.

Out of default and once again reported as “current and timely” to the credit bureaus. Credit card companies do the same. Although they are still upside down in their home within a few years of paying off the principal, watching the economy grow, and the value of their property slowly increasing, they are now at least even or possibly having a capital increase. They have a cash surplus of $ 486 per month to live comfortably and / or pay off their debt faster. Their devastated credit immediately begins to improve, making them stronger and more productive consumers with each passing day. This means that instead of buying a frozen pizza or eating leftovers, they are going to buy a pizza dinner for the whole family.spend money within your community. The pizza business is improving and they must hire more people. Someone just got a new job, and with the debt amnesty granted to them, they now have the ability to grow and improve their credit and become stronger, more productive consumers. In a few years, they have good credit and enough money for a down payment on their new home. The bank has a new loan with a borrower who can make the payment, and the government is putting in more tax money to pay the deficit. The recovery circle is complete !!

Wait, let’s go back a minute.

All those defaulted mortgages that were granted a loan modification with principal reduction will no longer go into foreclosure. The REO property’s shadow inventory stops growing and is actually starting to decline. The supply begins to get closer to the demand. Demand begins to grow as supply shrinks and the most productive consumers can buy again. This begins to drive the housing market higher. Just a few years and the housing market not only fully recovers, it is about to flourish again, of course, with new constraints to prevent a repeat of the scenario.

I’m sure there are many out there who have a thousand reasons why this is “Crazy Talk, Absolute Insanity” and “It could never work.” I’d be willing to bet that 90% of them would lose money for something like this.

Tell me am I crazy or am I brilliant?

Tell me what you think on my blog at http://www.promero.noteoffers.com