With all the talk of the mortgage crises and what to do I have given it some thought. First you need to see the big picture and not just look at the 700 billion in tax money spent. This problem affects every aspect of the economy and country. Now remember I do not know all the facts but this is my idea. Banks are struggling under loans the people can no longer make the payments on. The people with those loans are falling behind because they now have to start paying principle on the loan that up to now was just interest. Banks have to write off loans and take huge losses. Now the blame goes all the way around from people who borrowed more than they should have, to the mortgage brokers that sold loans they knew were too risky, to banks that loaned to full value of the property so there was no equity in the property if the value went down.
I agree that the banks should not get off completely free. I propose that the government buy the bad loans from the banks and for this they be assessed a special tax on all profits for the next 20 years that starts at 20% and reduces 1% each year for 20 years till it disappears. This is only on their profits and would go into the fund that bought the loans to hopefully cover any losses the government might take on the loans.
Next sense the government sets interest rates they could reduce the rates on the loans they buy to 3%. The people would continue to make the same payments they were when they took out the loan. Now if you have a $250,000 interest only loan at 5%your payment would be $1042.00 a month. Now if your reduce the interest to 3% and they make the same payment of $1042 they would pay the loan off in 30.5 years which would allow the government to make 3% on the money they borrowed from the tax payers. The people with the loans would see their interest rates drop so they would get less of a tax write off. Again on a $250,000 loan their interest payment would drop from $12,500 a year to $8,300 a year so they would pay income tax on that extra $42,200 a year. If the average tax payer pays 15% federal tax this would mean an extra $630 dollars a year.
Now the 3% the government collects on the loans should cover any costs they incur for managing the loans as all they have to do is process the payments so there shouldn’t be a lot of labor involved and should be a little extra. The government would also collect the extra federal tax from the home owners and the special taxes on companies for 20 years. Also sense they will not be issuing any new loans the money should be paid back over the next 31 years give or take a couple years.
This would get the banks back on sound footing and stabilized the housing market because home would not be foreclosed on and homeowners would not have to sell their homes for whatever they can get to get out from under a loan that goes up to where they cannot afford it. This would also cut the supply of houses on the market which would stop housing prices from falling. Falling housing prices cause a big problems for states, counties and cities which are seeing their budgets shrink as they collect less tax dollars so they will not have to raise property tax to cover falling tax revenue.
This brings us full circle. Everyone has a part in fixing the problem and we can work together. Now this is a pretty simple plan and again I don’t portend to know all the information and there may be more to it then what I have here but it would be a go start.
