Since everyone in America is expected to have an alternative plan to Sec. Paulson’s, mine is as follows:
Purchase the mortgages below face value. Keep the interest rate the same but tied to what the Fed paid instead of the face amount so the homeowner pays the same interest rate but gets a reduction in the monthly payment. The Fed makes a current profit on the spread between its cost of funds and the mortgage rate. This profit is earmarked to reduce the deficit.
Don’t reduce the principal amount of the mortgage but offer 15 and 30 years terms with options to pay it off sooner. Thus the homeowner has 15 or 30 years for the house to re-appreciate. Make the loans assumable which will increase the value of the house due to the below market financing, i.e. the buyer gets the benefit of the lower monthly payment but still has to pay the balloon when the loan is due. Earmark the Fed’s capital gain on repayment for the Social Security Fund which then gets a boost in 15 and 30 years when it will be needed. Finally, have the selling institution co-guaranty the loan.
The financial institution gets a cash infusion but is still responsible for losses on their bad loans but has 15 or 30 years to prepare for any loss or for appreciation to bail them out. The homeowner pays the same interest rate but gets a more affordable monthly payment, doesn’t get out from under his bad decision to take the loan, but also gets 15 or 30 years for appreciation to bail him out. The taxpayers tie up some of the national debt capacity foregoing the use of funds for other purposes but makes a positive current return on investment and a capital gain.
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