The $700 billion bailout passed by Congress fails to address the real needs of the economy. The legislation pours money without restraint into banks whose executives have made the bad business decisions that put their banks and the world economy in peril. A more effective approach would have been the negative equity buyout I describe in this article.

The Negative Equity Buyout

The real estate crash has put the American Dream of home ownership in jeopardy. Starting in 2002, the housing market began overheating. Financial institutions took advantage of the soaring home market with the proliferation of sub-prime loans and interest-only loans. With the bursting of the real estate “bubble” in 2007, homeowners were plunged into a nightmare. Anyone who bought their home during this period or refinanced their home suddenly found they owed more for their home than it’s worth. This has resulted in a massive number of foreclosures and short sales.

I propose that the 2002 appraised values of the homes be used as a baseline for the negative equity buyout. Homeowners whose mortgages exceed the values of their homes would be eligible to apply for this program. This would reduce the balance on primary residences to 2002 values, dramatically reducing monthly payments and stabilizing the real estate market. If a home did not exist in 2002, the baseline will be the 2002 value of a similar home in the same area. The program would apply to mortgages and home-equity instruments. Low-interest debt-consolidation loans would be made available to stave off the impending credit crisis caused by defaulting credit card debts.

Here’s how this economic recovery works.

First

The negative equity buyout program only applies to the mortgage(s) on a person’s primary residence. Speculators or others with multiple housing units (single-family homes, condominium’s or apartments) could only apply for their primary residence and not for any additional housing units. Since speculation and house-flipping have triggered the real estate crisis, these properties would be exempted from eligibility.

Second

The homeowner, who applies for the negative equity buyout, will have the principle on his/her mortgage(s) reduced to 2002 value. The financial organization owning the mortgage(s) would be paid the difference between the home’s mortgage value and the 2002 value with the requirement that the resulting equity be available for special low-interest debt consolidation loans. The homeowner will pay the new, reduced mortgage at the fixed rate equal to the current market mortgage rate. The duration of the mortgage will not be changed.

Third

The funds released by the negative equity buyout will become available for low-interest debt consolidation loans. These loans will be available to homeowners with more than $15,000 in unsecured debt and to non-homeowners with more than $10,000 in unsecured debt. The loans will have a five-year fixed rate. Participation in the debt consolidation program will have the following structure.

• Fixed Interest Rate – The debt consolidation loan will have a five-year fixed rate. For homeowners the rate will be ½% above the current market mortgage rate. For other individuals, the rate will be 1 ½% above the current market mortgage rate. This program is not available to corporations, partnerships, trusts or other such tax and liability structures.
• New Debt Acquisition – Any participant in this program may not acquire any new unsecured debt such as credit cards, signature loans or similar debts for a period of one year following the debt consolidation loan. Student loans and credit card purchases paid-in-full within one billing cycle are exempt from this restriction. Engaging new unsecured debt during the first year of participation in this program will cancel the fixed rate clause of the loan.

This debt consolidation program will prevent most of the predicted massive wave of credit card defaults. By preventing these defaults, this program will help prevent the crippling crisis and potential bank failures that follow a collapse of the credit card systems.

The use of the above negative equity program and the accompanying debt consolidation will help to stabilize the economy of the United States by strengthening the banking system and restoring financial liquidity to the American people.

Richard Moolick

Call 4 Action

Please contact your Senators and Representatives and ask them to sponsor this program.

Tags: Bailout, credit, equity, financial crisis, housing bust, mortgage, speculation, speculator

This entry was posted on Tuesday, October 28th, 2008 at 12:43 am and is filed under Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.