Letâ€™s start with the premise that lenders are taking 20-30% hits on short sales. Then, letâ€™s have the US Treasury loan 30% of the balance, of the aggregate debt, to homeowners whom request it, in order to pay down the first mortgage (or second mortgage). If I have $200,000, in aggregate liens against the property, the US Treasury will lend me $60,000, to pay down those aggregate liens, to $140,000. This reduces the lenders exposure.
What type of loan will the Treasury make to homeowners?
The term can be for the lesser of:
1- the remaining term of the first mortgage
2- 65 less the age of the primary borrower.
The interest rate can be the corresponding term treasury rate, plus .5% (for administrative costs). Maybe we can use some of that â€œyield spreadâ€ to coerce a few mortgage brokers to â€œoriginateâ€ this government debt (okay, that was completely self-serving). For a 42 year old, with a 27 year term on his first mortgage, the term of this new government loan (in second position) would be 23 years (65-42=23). If a 23 year treasury bond yields 4.1%, than the note rate for the new loan will be 4.6%.
The borrowers never have to make a payment on this debt; it accrues like a negative amortization loan. In the aforementioned example, the balance would grow to about $168,000, after 23 years. With a first mortgage paid down to $140,000, weâ€™re banking on the future value of the property growing to $308,000, by the year 2031.
When the house is sold or refinanced, the government loan is paid off. Weâ€™ve essentially solved the liquidity problem, bottomed the real estate decline, and â€œhelpedâ€ real people by using government funds.
What if the borrower skates on the loan or short sells the property? Moreover, what if the real estate market NEVER comes back, and the property is never worth $308,000, in the next 23 years?
1- Make the remaining loan balance transferable to new properties.
2- If that lien is NEVER satisfied, deduct the balance from the year 2031 net present value of the borrowerâ€™s retirement entitlementsâ€™ account (social security and Medicare).
The program is completely optional.