Tuesday, March 3, 2009

A Home Relief Plan With Merit and Consequences

Here is a better way to address the failing housing market. The government opens up a new hosing department. One that is understood to have a hopefully temporary life span. This new agency will negotiate a new value for the home. The new housing authority will then buy the house from the bank for whatever “payoff” is. They get their money back. If they had planned on that interest coming in, they are no different then the home buyer who though he would be employed and healthy for 30 yrs. “You guessed wrong. Here is your consolation prize, your money back.”

People who sign onto these programs are relinquishing the ownership of the house. The difference between the payoff value and the newly negotiated market price becomes a debt to the participant. Strict limits would be placed on their ability to hold credit. The ex-homeowner has proven by their situation that they do not grasp the risk of credit. A 5% increase in their taxes will be asses in order to pay off the remaining balance.

These previous occupants who were renting it from the bank have a few choices. They can stay and rent the residence from the new government agency who has the asset of time. The US government will hopefully be around for 50 or 60 years more if it takes that long. It shouldn’t. The appraisal should catch most impending large maintenance problems on the horizon. A rental agreement can be worked out to better suit the troubled home owner. 60% of all of the money collected would be applied towards the debt. The other 40% would be used to pay for taxes, insurance, and administrative expenses. This would be in addition to the 5% tax liability and help to speed along the paying off of the debt. As a side affect it would also hold down the demand on rental units that could be a backlash of so many people loosing their houses. When the debt is settled the option to purchase the home at the new market price should be made available. They could keep renting, but at the risks involved with that option. Much like when renting a home, from the moment the new price is set, the house will be available on the market. The ability to stay and rent is a courtesy extended but not a right. Of course the government will have a vested interest in the rental agreement at first as well.

Looking at a number example of how this would work. Let us say that you paid $100,000. The new government agency, using metrics based in realism, local salary averages, and on a 10 year loan, the new value of the house is set. Let us say in this case the house has lost 40% of its value. So the best market price expected is determined to be $60,000. The payoff price for home was $80,000. The government pays the bank the $80,000. The default homeowner now owes the government $20,000. Under the old terms the loan was costing the homebuyer $625 per month plus taxes and insurance. The new arrangement could be done at the rate of $450 per month straight rent. That would be based on a 5 year plan to pay of the $20,000 and $160 per month for expenses. The home owner would be responsible all financial responsibilities one would expect a renter to pay. Since the income tax is also being asses, it is possible for these debts to be paid off in 3 years or less.

Now the ex-homebuyer could just move out. Maybe they don’t have a job and/ or can’t afford the new terms. They will not feel the penalty until they get employed. Remember it is coming out in taxes. If you are not making money, you are not paying taxes, and you are not being restrained by your debt. Like I said, the government plans on being here a long time. It can wait.

In the end, the loan agency got the money back that they loaned out, plus whatever interest they had accumulated to that point. The government gets a piece of property valued appropriately for the new deflating market. The defunct homebuyer gets a term option for paying the debt back and a possible option for staying in the home.

There is a glut of vacant houses on the market. The same offer could be made to whoever is the current owner of a vacant house. The government will agree to try to fill it with displaced ex-home owners. The new agency will have a department dedicated to basically being land lords. There are unemployed home inspectors and realtors that could easily fill these positions. As a home owner, you sign up for the program. Your house is assessed and devalued. It becomes an asset to the US government. The current owner now owes the government housing relief agency the new value. No interest, and new terms. The same 5% tax on income also is invoked. The difference is that the government agency collects the difference between the pay off value and the newly assessed market value from the renter they placed in the home. More then likely renters who were once responsible home owners. Here is were terms cold get into the 10 year or longer term.

In this case basically you are taking a house that is empty and owned by a person who is struggling to pay for it. It gives an option to those who have lost their jobs but don't want to loose their house. They have moved in with relatives or lower cost housing arrangements. They are renting to people who have lost their homes. As in the first case this splits the obligation to repay. They have an opportunity to keep the home. Rent for the house can be made more affordable.

This plan should be a limited time offer. Say one year it will be offered to those who want to take advantage of it. Anybody hired to participate in the program should know that the temporary jobs are only expected to last 10 years. It should be coupled with new regulations on credit and home loaning. The biggest new regulation being that no loan can be made for more then 10 years.

This plan is based on the acknowledgment of two realities. 1) The housing market has been over priced for years. While everybody calls the sale price the “market price” in reality the market price has been the amount people have been willing to pay over the terms of the loan. In most cases that has been 2 to 2.5 times the sales price. 2) That the only people who can be burdened with the cost of these bad financial decisions are the ones who agreed to pay them. That is how our system works. The government guarantees you have the right to the opportunity of life liberty and happiness. However, it doesn’t guarantee these attributes to you.

Of course my usual discloser that says, “If we don't stop sending our capital to economies that are subsidies by socialist and communist social programs. We will never get ahead. (National health care, free education, housing subsidized, energy cost reductions) These are things that in the free market economy must be paid for by the employer or the employee. Until our capital stops leaving our economy faster then we bring it in, we are destined to need programs like these.

No comments:

Counter text

New counter