While there are many problems with the different stimulus packages proposed, the two biggest are, 1) complexity and 2) congress is selecting winners and losers. As can be expected, the more complex packages will have a higher likelihood of failure. In addition, when congress selects winners and losers, the loser will feel cheated and there is a real risk that congress will select the wrong winners, or least effective winners, to solve the problem.
Solving the home mortgage and banking crisis requires a simple plan; and I have such a plan!
The U.S. Government should allow everyone to refinance his or her real estate loan at 4.25%, for up to 30 years, interest only. In addition, all new purchases with an acceptable down payment could also receive the 4.25% interest rate. This plan should be available to all owners and buyers of real estate except large commercial properties.
Advantage 1: It does not cost the taxpayer money! The current 30-year U.S. Treasury rate is 3.56%. That means the government borrows for 3.56% and lends for 4.25%. The government makes money!
Advantage 2: It will clear out the “toxic debt” from the banks! Currently, banks do not want to sell their debt for what the private equity funds are offering and therefore, toxic debt is in a stalemate. There is no agreement on what the fair market price really should be. If the government buys the debt, we taxpayers risk that the price we pay is too high. On the other hand, if the government pays too little, it does not solve the bank’s problems. By letting everyone refinance his or her loan, the toxic debt will be cleared out at no cost to the taxpayer!
Advantage 3: It puts money back into the pocket of the consumer! A $250,000 loan at 4.25% will save over $350 a month if the consumer currently has a 6% interest only loan. Many loans are at 6% or greater so the savings could be even higher.
Advantage 4: Allowing this rate for new purchases will help spur home sales and prevent the risk that people will be “stuck” in one location.
Advantage 5: Allowing the owners of rental properties access to the same rate would allow them to lower their rents. Therefore, renters will receive some of the benefits.
Advantage 6: In most cases, commercial rates are higher than residential rates. Allowing small commercial building owners the same rate could decrease rents for small businesses; the powerhouse employer of our country!
Therefore, without costing the U.S. taxpayer a penny, this simple plan would eliminate the toxic debit, help millions of Americans stay in their homes, help many more millions increase their disposable income, spur home sales, and decrease the cost of residential and commercial rents, which, in turn, will stimulate business and the economy.
For the sake of brevity, this is just a summary. While the devil is always in the details, the details of this plan are simple… mainly because the plan is simple. A simple plan is also simple to execute and implement. It is also simple to explain.
What if nobody pays back their loans? The banks didn't have to worry about that because their plan was always to sell the loans, but if the government doesn't plan to do the same thing, then they have to be prepared for massive defaults. (Even if the defaults don't happen, the lender still has to be prepared for them, right?)
Posted by: Andy | February 25, 2009 at 10:48 PM