By taking the 10 solutions presented here, and turning them into relevant policy rules that are practiced nationwide, we can greatly reduce the possibility of homeowners losing their homes to foreclosure. We can stop families from becoming homeless, stop economic downturns from effecting foreclosure rates, as well as stopping housing bubbles that leave people in ruin when they collapse. At the end, I will tell you how we can make homes more affordable in the long term. So, let’s begin:
1. Banks will give homeowners, who have a mortgage with them, six extra months to pay off their loan, from the term length – e.g. 366 months to pay a 360 month loan or 186 months to pay a 180 month loan
When a person signs the paperwork to get a home loan, they will agree to have an extra 6 months attached to their loan payment schedule. These extra six months would be used during times of financial duress in which the homeowner cannot pay for his or her mortgage. In other words, a homeowner would be allowed to skip a monthly mortgage payment up to six times, and the mortgage amortization schedule would just be moved up a month after each time this happens.
Keep in mind that if we are going to do this properly, for a homeowner to be allowed to skip a month or more of paying their mortgage, they would have to be in contact with their lender, and get approval, showing that they are under financial duress. They will not be able to just ignore any attempts of contact by the lender and hope to automatically get one or more months free. This, of course, would mean that the Federal Reserve Bank would need to be complicit in all this as well.
2. Setting up a back-up mortgage payment fund
When a person fills out the agreement forms to purchase a home, they will automatically be given a back-up fund with whatever bank from which they are getting their home loan. These homeowners will be allowed to freely put money into a back-up mortgage payment fund that can be used in emergencies. Whenever the homeowner has some extra cash, he or she can choose to put it into the back-up fund.
Since all homeowners who have mortgages would be required to have one of these type of accounts, which is the equivalent to a savings account, we would theoretically see the amount of money in savings at banks and credit unions increase greatly, which banks could use as part of their reserve requirements, allowing banks to have more money to loan out, perhaps by increasing the number of home loans approved, or to people wanting to start their own businesses, and have gone through the proper procedures to acquire a business loan. In the end, this would strengthen the economy and improve the economic outlook, making it less likely that the economy will downturn and reach the point of causing a housing crash or economic recession. This back-up fund would be created in conjunction with the three ideas I introduce next.
3. All home loans should be required to have an extra six-month back-up cash, included in the loan amount, that is automatically put into that back-up fund.
For example, a loan for $150,000 (forget about realtor, loan origination, and title fees in this example), payable over 30 years, at a 5.00 percent interest rate would be about $805/month. Since six months of back-up payments, or $4830, automatically go into the back-up fund, the purchaser would only be able to use $145,170 to buy a home. Mortgage lenders would need to create new amortization schedule tables for loans at each interest rate and length of mortgage based on this scenario. Of course, the extra cost associated with requiring home-buyers to do this could be offset by lowering the interest rate a little bit. This would mean that the Federal Reserve Bank would also need to be complicit in this.
4. Instead of having a PMI (Private Mortgage Insurance), homeowners would be paying into the back-up payment fund.
When the bank approves a loan to a person who doesn’t pay a certain percentage of the cost of the home by way of a down payment, typically 20 percent, and in some cases 10 percent, banks right now typically require the new homeowner to have PMI as part of their monthly payment, in the case they can’t pay and their home goes into foreclosure. Instead of a person paying money each month toward a PMI, that money would instead be put into that back-up mortgage payment fund.
Over the course of a year, the amount of money put into the back-up fund would be enough to pay one or two extra monthly payments if the homeowner got to a point where they were unable to pay. If the homeowner has less money in their back-up fund than the amount needed to pay for 12 months of mortgage payments, then this money would continue to be put into the back-up fund; if that same person has 12 months back-up, then that money would be spent to help pay down the principle balance on the loan.
5. Requiring that all mortgage payments be done on a bi-weekly basis rather than once a month, for a total equivalent of 13 monthly payments a year, the extra monthly payment going into the back-up mortgage payment fund.
If homeowners were required to make half-payments every two weeks rather than whole payments once a month, they would end up accumulating an extra monthly payment over the course of a year. This extra monthly payment would be required to go into the back-up fund rather than be used as a monthly extra principle payment if the back-up fund doesn’t have enough funds to cover twelve months, or an entire year, of payments. Also, once again, the extra cost of requiring a homeowner to do this could be offset by lowering the interest rate even more.
6. The Variable Payment Plan
This kind of mortgage payment plan would be for people who are business owners, or are salespeople, or anyone else with the type of income that can vary quite widely based on the month or season. Instead of that person being required to pay a set amount each month to a mortgage lender, a different type of system would be set up.
First of all, we would add up the cost of all the mortgage payments over the life of the loan, and require that the homeowner pay that total amount, and give him that total time period to pay off that entire amount. For example, that same $150,000 loan, payable over 30 years, at 5.00 percent interest, would add up to $289,883. A person under this type of plan would have 30 years, or less, to pay off that amount. That means if one month, the business owner can pay only $200, but the next month that same person can pay $1500, then both would be acceptable, as long as there was a regular continuous stream of payments.
Of course, just to be even fairer to the homeowner under this plan, and the mortgage lender, the program would be broken down into 5-year increments. Under the same loan example, that person would be required to pay $48,314 over the course of five years. If, after five years, that homeowner has paid an extra $10,000 to the lender, then the lender would take that extra money as payment to pay down the principal balance, and the rest of the loan schedule would be modified just as if he or she were under a normal mortgage making extra payments to pay down their principal balance on their loan. On the other hand, if under this type of payment program, the homeowner is below the amount they need to pay, by, say, $10,000, then that amount would be added to the principal balance, and be required to be paid off, with interest. It would probably be helpful if, when using this type of payment plan, the lender be allowed to legally, by loan contract, deduct the mortgage payment amount out of that person’s paycheck, in a way that doesn’t hurt the homeowner’s credit rating.
7. Reverse Mortgage as a type of back-up
If a homeowner, after being laid off, has used up the total amount in his or her back-up mortgage payment fund, a type of reverse mortgage plan would kick in. The first question for the bank to ask is: How much equity is in this house? If there is some equity in the house, it will be used for this reverse mortgage. In other words, since the homeowner can’t make any payments, the amount of that monthly payment, principal and interest, would be added to the total principal balance of the loan, and the payment schedule adjusted based on the regular monthly payment agreed upon.
For example, say a person took out a $150,000 loan, payable over 30 years, at 5.00 percent interest, where the monthly payment is $805. They still owe $129,843 on their mortgage, with an interest of $542, and a principal of $263. Since the homeowner has $20,157 equity in the house, the lender makes the mortgage payment to itself, putting that total payment amount, principal and interest, back into the total principal owed by the homeowner. This means that the homeowner now still owes $130,648 on his home to the lender (after that one monthly payment is made using this type of reverse mortgage payment system), meaning that he or she has lost the equivalent of three mortgage payments that will need to be paid again.
Keep in mind that with this payment assurance program in place, that means that the more the homeowner still owes on his or her house, and the less overall payments that have been made to pay down the principal, the more this will cost the homeowner. For example, if that same homeowner only owed about $100,000 on the principal of his or her loan, then when the bank paid that monthly payment for him or her, the homeowner would only lose the equivalent of roughly two monthly mortgage payments, which they would have to pay again, instead of three payments.
As you see, this allows the homeowner to not lose his or her home, but can also be very costly to that same homeowner, who now has to repay some of the monthly payments that he or she already paid once, which can be very motivational to that person, giving them that extra push to find that next job after they got laid off. At the same time, this plan also allows the mortgage lender to make even more money, income, from that loan, so the lender would not be in a financial bind, but would benefit from this strategy also.
8. Approved Self Short Sale and Refinance
If the homeowner can no longer get employment making the same amount of income as before, is having trouble making enough income to pay his mortgage payment, albeit still making an income, and there is some equity in the house, the homeowner should be allowed to do, by their lender, to what amounts to a short sale to themselves with a new loan from either the same lender or a new lender.
For example, a person owns a $150,000 home, getting a 30 year loan at 5.00 percent interest, and still owes $120,000 on the principle. The lender agrees to a short sale of $110,000. They would be able to get a new loan for $110,000 at 4.00 percent interest, for a new 30 year loan, knocking down their mortgage payment $280 per month, and saving themselves some money each month to match their lowered income. Of course, the Federal Reserve Bank would need to be complicit in all of this.
9. Let People Stay in the House Until it Sells.
If a person can’t make their monthly mortgage payments, have used up their six payment-free months, have used up all the money in their mortgage back-up savings fund, and used up all the equity using the reverse mortgage strategy, and they still don’t have any way to continue to pay for their mortgage, instead of having a foreclosure done on their home, and evicting the people that live there, which puts strain on that family, as well as the banking institution that provided the loan to that homeowner, allow that person, and their family, to stay in the home until it gets resold to someone else.
To make this plan work, you need to have three other policies in place. First, if the original homeowner, that can’t pay his or her mortgage will need to continue taking care of the home, keeping it in good condition so that is can be sold to another buyer. Second, when the house is sold, the former homeowner will get some money (e.g. $5,000) to leave the property. This ensures that someone is taking care of the property, which reduces upkeep costs for the bank, allows the bank to get their money back, and allows the former homeowner to leave with their dignity intact and some money to get reestablished elsewhere. Thirdly, the original homeowner will be required to get some kind of job, even if it is one that pays less, and have a portion of their wages deducted to make monthly payments to the bank – this setup would appear on the homeowner’s credit record not as a bad credit, but as someone who has consistently made monthly payments, which will allow them to more easily qualify for a mortgage once they leave, or at the least have enough credit to qualify to rent some apartment somewhere.
10. Dedicated Recruiters for Customers of Mortgage Lending Institutions
Since mortgage lending institutions depend on their customers having employment to have the income to be able to make their monthly payments, and loss of employment for a lender’s customer could mean a financial loss for the lender, it would be in the lender’s best interest to hire lower-level recruiters, who do well with all people, and are salesmanship-oriented, to help their unemployed customers find new work. Since a sales-oriented recruiter is many times better with people than some of the best skilled workers who haven’t spent as much time on their social and salesmanship skills, they may be more likely to establish the rapport needed with a potential employer than the skilled worker themselves, increasing their likelihood of getting work.
Not only that, but the recruiter, who works for that lender, perhaps for several years, would be very likely to build up rapport and good relationships with members of the hiring offices of many businesses, greatly aiding in establishing the connections needed between the potential employer and the potential employee. This would be a benefit to the homeowner, in that they get the dignity of work, and be a benefit to the bank also, in that they would continue to receive mortgage payments from that customer.
Summary
As you can see, if we allowed all of these 10 different strategies to come into play, we could do all of the following:
1. We could greatly reduce the possibility of people losing their homes due to unemployment or other unforeseen financial hardships, including reducing the possibility of homelessness, at least the kind caused by foreclosure.
2. It would take away much of the worry that middle-aged and elderly people have due to housing situations they sometimes find themselves in.
3. It would increase the amount of savings that are stashed away in banks and credit unions, increasing the amount of money they could loan out. That could mean that banks would have more money to loan out to people trying to get business loans.
4. It would increase the amount of new businesses that could possibly be started as a result of increasing the amount of business loans a bank can lend out, which, in itself, is a benefit to society and the economy.
5. It would reduce the amount of money that the government has to spend for welfare purposes and for unemployment compensation, reducing their expenditures enough to reduce, and maybe even eliminate their deficit and start paying off their enormous debt.
If you like all of these strategies, or even just a few of them, and think that making public policies based on the ideas in this article would be better for our general welfare, please consider recommending these ideas to your congressperson or senator. Also, share this with your friends, and everyone you know, using your social media, so that they can recommend this to their congressperson or senator.
