A Modest Proposal to Stop the Mortgage Crisis

[profette_IHB]

The Wall St. Journal offers this "modest proposal" for dealing with the mortgage crisis:

How to Stop the Mortgage Crisis

The potential collapse of house prices, accompanied by widespread mortgage defaults, is a major threat to the American economy. A voluntary loan-substitution program could reduce the number of defaults and dampen the decline in house prices -- without violating contracts, bailing out lenders or borrowers, or increasing government spending.

The unprecedented combination of rapid house-price increases, high loan-to-value (LTV) ratios, and securitized mortgages has made the current housing-related risk greater than anything we have seen since the 1930s. House prices exploded between 2000 and 2006, rising some 60% more than the level of rents. The inevitable decline since mid-2006 has reduced prices by 10%. Experts forecast an additional 15% to 20% decline to correct the excessive rise. The real danger is that prices could fall substantially further if there are widespread defaults and foreclosures.

Irresponsible lending created new mortgages with LTV ratios of nearly 100%. By the end of 2006, the fall in prices caused 7% of mortgages to have LTV ratios above 100%. A further 20% of mortgages had LTV ratios over 80% and will shift to negative equity as prices decline. More...

What do you think? Modest proposal? Indecent proposal? Or?

 

[Nude_IHB]

Other than allowing people like me to shave a few points off a few thousand dollars of our mortgage, I don't see how this really helps stave off the implosion. Essentially, it's just a second (albeit at a very low interest rate) mortgage but that doesn't change the amount you actually owe on the house. This isn't even a snorkle for underwater home-owners, much less SCUBA gear.

 

[FairEconomist_IHB]

Everybody should read Tanta's inspired response to this stinker. A highlight:

A monthly savings of $61.41! Oh Lord, they'll flock to this! Non-dischargeable full recourse debt that prevents you from ever cashing out if home values do ever recover, until you've paid off that low-rate loan! Plus the new loan is an ARM, so it can get worse in two years! In fact, it only has to adjust up to 5.00% for the total payment to be higher than what you started with, given a 15-year amortization! But that's not a problem, because we know people will think about the lower interest costs over decades, not the higher monthly payment today! And besides that, when the hell has a 2-year Treasury note ever been five percent, huh? Oh, sure, if you're going to worry about some kind of a doomsday scenario . . .