A reward for responsible homeowners
15.09.2010 00:01
A reward for responsible homeowners
By , senior editor-at-largeSeptember 8, 2010: 11:33 AM ETFORTUNE -- The government has bailed out Wall Street firms, giant banks, creditors of Fannie Mae and Freddie Mac -- and is trying to bail out people who've defaulted or are about to default on their mortgages. But let's say you're a hardworking family that has done nothing wrong except buy a home when the housing bubble was at its peak a few years ago. Your mortgage is now way underwater, but you're still making payments because you want to stay in your home -- and you're actually honorable. You're paying for everyone else's bailout, but because you have no equity in your house, you can't refinance to take advantage of the ultra-low mortgage rates that Uncle Sam's bailout strategy has produced. To use the technical term, you're being screwed.
Enter Keith Gumbinger, a leading mortgage expert, with an interesting proposal for how the government can help you, help the housing market, and even help whoever owns your mortgage. Gumbinger, a vice president at the HSH Associates mortgage consulting firm, wants the federal government to issue what he calls "value gap coverage." It would reduce your interest payments, reduce your incentive to walk away from your mortgage, and show that behaving well doesn't make you a sucker.
"This is for people who are underwater on their mortgages but still current on them and have every intention of remaining so, and hope to remain in their homes for the foreseeable future," says Gumbinger. "These people are being compelled to pick up the tab for reckless borrowers and failing banks, and get absolutely no help from anywhere for themselves. How about a reward for doing the right thing for a change?"
Let me show how this would work, using HSH numbers that I've rounded for simplicity's sake. Say you bought a house for $350,000 in July 2006 -- those were the days of 100% financing, so you borrowed $350,000 on a 30-year fixed-rate mortgage at 6.8%. The house is now worth $280,000, but your mortgage balance is $334,000. The current rate for a 30-year fixed-rate loan, if you could get one, is 4.7%.
Under Gumbinger's plan, you'd get a new $280,000 mortgage at 4.7%, and the government would guarantee the other $54,000, on which you'd pay 4.7% interest to the current mortgage holder. This would reduce your payments by $6,700 a year, or roughly 25%. Your mortgage holder wouldn't have to take a write-down, because the shortfall would be guaranteed by Uncle Sam. You get lower payments, preserve your credit rating, and save your pride by not becoming a deadbeat.
The government is probably on the hook, in one way or another, for some of your shortfall now. This way everyone gets breathing space for the home market to recover. The government's exposure would shrink over time as house prices begin to rise modestly (or so we hope) and your payments gradually reduce the principal on your loan. You wouldn't have any equity in your house until its market value exceeds the loan balance plus the government's guarantee. But then again, you don't have any equity now.
Gumbinger says there are many differences between his proposal and the government's latest mortgage relief effort, including the fact that the government's requires mortgage holders to take a writedown, and his doesn't. You can find his detailed plan, with the fees he proposes to cover costs .
Sure, this plan isn't perfect. Among other things, we'd have to make sure people didn't immediately sell their house, stick the government with the $54,000 bill, then buy another house with a low-down-payment FHA mortgage to reduce monthly payments and have all the equity upside.
But Gumbinger's idea strikes me as a better place to start than current restructuring programs, which sound great but somehow don't seem to work out.
How much would this cost the government? Who knows? But it has to be cheaper financially and socially than leaving millions of honorable homeowners at higher risk of foreclosure and forcing them to pay above-market rates on underwater loans.
#cnnfb_connect {background-color:#f5f5f5;width:auto;height:auto;padding:10px;clear:both;} First Published: September 7, 2010: 5:49 AM ETRight Now
BP's incoming CEO Robert Dudley told analysts that total damages from spill could be less than the money set aside for damages, says Citigroup. Congress returns to work. First up: Two measures aimed at boosting small businesses by pruning regulation and goosing loans. Can't find satisfaction through a company's 800 number? Try these tips for making your case online.
| 30 yr fixed mtg | 4.39% |
| 15 yr fixed mtg | 3.85% |
| 30 yr fixed jumbo mtg | 5.39% |
| 5/1 ARM | 3.42% |
| 5/1 jumbo ARM | 3.98% |
Find personalized rates:
Bankrate.com.
Begin by taking on affordable student loans, opening a credit card or adding yourself as an authorized user on your parent's card. Paul Otellini says the Obama administration's economic policies have not resulted in job growth or increased confidence. The first luxury, plug-in hybrid electric vehicle is close to production release early next year.
| Company | Price | Change | % Change |
|---|---|---|---|
| 3.94 | -0.05 | -1.13% | |
| 13.74 | -0.21 | -1.47% | |
| 21.51 | 0.25 | 1.18% | |
| 25.10 | -0.00 | -0.02% | |
| 18.74 | 0.18 | 0.98% |
| Index | Last | Change | % Change |
|---|---|---|---|
| 10,526.57 | -17.56 | -0.17% | |
| 2,289.44 | 3.73 | 0.16% | |
| 1,121.04 | -0.86 | -0.08% | |
| 2.67 | -0.08 | -2.74% |
Sections
The revolving door at Nokia continues as Jorma Ollila, chairman of the board, steps down, following Nokia's CEO and head of the smartphone unit. | A time-tested indicator says the markets benefit from midterm elections, but some strategists think that won't happen this cycle | Cisco says it will begin paying a dividend of 1% to 2% by July 2011. | Senate votes to end debate on the Small Business Jobs Act. Final vote could come later this week. | In these great college towns, you can expand your intellectual horizons, take in the sites and perfect the art of relaxation. |
Please create a screen name to access this feature.
Screen name (Select one with 3-12 characters; Numbers and letters only)
Forgot password
Enter your e-mail address below and we will send you an e-mail with a link and code to reset your password.
Password selection
Reset code
New password
Log in & let's get started!
Password
Remember me for two weeksNot a member yet?
Sign up or
Screen name
Select one with 3-12 characters;Numbers and letters only
You will receive an e-mail to validate your account
Password
Make it 6-10 characters, no spacesType what you see in the grey box
If you can't read this,Yes, I would like to receive occasional CNNMoney member updates about new features and special offers.
CNNMoney will use the information you submit in a manner consistent with our . By clicking on "sign up" you agree with and and consent to the collection, storage and use of this information in the U.S. subject to U.S. laws and regulations. ()
For our international users, please be aware that the information you submit when registering for our services is collected in the United States of America. In addition to being subject to our Privacy Policy, the collection, storage, and use of your data will be subject to U.S. laws and regulations, which may be different from the laws and regulations of your home country. By registering for this service, you are consenting to this collection, storage, and use.
We're Sorry!
This service is temporarily unavailable. Please try again soon.
Thanks!
Please check your e-mail and click the link to confirm your membership. Then, you'll be ready to participate in all activities and conversations on our site.
Add comment