How to Fix The Economy, Create Jobs, Stimulate Spending, Stabilize The Housing Market, and Reduce Foreclosures

Difficulty: Challenging

Instructions

Things You'll Need:

Be a Mortgage Lender.
Be a Private Lender.
Be an FHA or HUD Representative.
Be a Congressperson.
Be an Advocate.

Step 1

The first step is to understand the economic climate we are experiencing, and to briefly outline how the issues are directly related and affect each other. This is a very basic explanation, and there are definitely more complex working parts within it: High risk loans were implemented by sub-prime lenders, borrowers were unable to repay their debt from high interest rates, they were foreclosed on, the high volume of foreclosures lowered real estate values nationally, homeowners were unable to sell for profit, homeowners lost equity, the housing market collapsed, major banks collapsed, construction ceased, spending ceased, jobs were lost, companies lost revenue from lack of sales, more jobs lost, more companies closed.
Step 2

In order to reverse this trend, the focus needs to be on reducing foreclosures. But how is this done with 10% unemployment, and homeowners unable to maintain their expenses due to lost wages? Simply by creating a new mortgage product that addresses the needs for these situations. For additional reference material, please visit my other article that explains how to understand a Reverse Mortgage.
Step 3

In it's simplest form, a Reverse Mortgage is a negative equity mortgage program through the FHA for senior citizens over the age of 62, where there are no monthly mortgage payments, and borrowers have access a portion of the equity in their homes to spend for their financial needs. There is no credit requirement, no income requirement, and no employment requirement. What if there wasn't an age restriction? What if anybody was able to get this program? What changes would be needed to make it a viable product? What effect would it have?
Step 4

Key Results of the new reverse mortgage product:

· Stabilize the Housing Market.
· Reduce Foreclosure Rates.
· Stimulate the Economy.
· Simulate Job Growth.
· Generate a New Revenue Stream for Investors.
Step 5

With a Reverse Mortgage, the borrower will have no monthly payment obligation. This will result in a complete cessation of non-payment default loans, and stave off all potential foreclosures for those borrowers that qualify. The reduction of which will result in stable home values, and appreciation of neighborhood areas.
Step 6

The ability to cash out equity in a lump sum, receive monthly payments, or line of credit in combination with the absence of any housing payment obligation will allow borrowers to use a greatly increased amount of disposable income for the purchase of goods and services. With such a vast difference in budgetary restraints, it will allow for an unprecedented economic growth in the United States.
Step 7

With the introduction of this increased cash flow, retailers and businesses will once again be able to thrive due to a massive amount of money being spent. Furthermore, when these business earn money, they can create new jobs, which reduces unemployment. It will also increase salaries, which makes it less of a burden to pay for monthly debt and household mortgage payments. This also reduces the foreclosure rates when people are employed and earning good wages.
Step 8

To reiterate, once in full effect, it has absolutely delivered us out of the economic recession by helping to maintain home ownership, reducing foreclosure rates, increasing spending, stabilizing the housing market, and creating new jobs.
Step 9

Investors will have the opportunity to lend money to borrowers without risk of non-payment. A regulated, and pre-determined maximum Lender Origination Fee, Servicing Charge, and Interest Rate will allow for profits in a non-predatory lending practice. In a virtually untapped market, the investors that initiate the program will have unlimited and unrestricted access to millions of homeowners.
Step 10

Program Highlights:

The alternative Reverse Mortgage Product will contain the following modifications to the pre-existing HUD specifications (http://www.reversemortgage.org/):

· No Age Limit Requirement. (Currently 62 years of age).
· Loan Term Limits will be mandated. (Currently no term limits exist).
· Home must be sold, refinanced, or the loan must be paid in full by term limit expiration. (Currently no term requirements).
· Interest will be simple and will not compound against loan balance.
· Loan to Value Ratios (LTVs) will be capped and remain low to prevent negative equity in home-ownership.
Step 11

This program will also maintain core elements of the standard Reverse Mortgage:

· No Income Requirement.
· No Employment Requirement.
· No Credit Score Requirement.

The purpose is to develop a program that is eligible to those who are most in need. For those that do not qualify due to preexisting high LTVs, once the program begins to take effect, the housing market will improve, and their home values will increase along with their available equity, offering them the ability to enroll, or obtain a traditional loan, or to sell in a more robust marketplace.
Step 12

In the event a home is not sold or refinanced, or the loan is not paid in full within the term limit specifications, investors may implement penalties or foreclosure proceedings. This would be in accordance to state and federal laws to determine the proper course of action for maximum adherence to program requirements.
Step 13

Underwriting Guidelines would be drafted to specify a complete and transparent information source for lending practices and program requirements similar to FHA. Included would be LTV, Income, Credit, Appraisal, and other core topics pertaining to risk and collateral analysis.
Step 14

Term Limits should be brief and Loan to Value restrictions should remain low. For example, a 3 or 5-year term, with a 50% - 65% LTV maximum starting balance, prevents the negative equity from accruing to an unmanageable balance or beyond the appraised home value.
Step 15

Interest Rates should be fixed rates only to ensure the exact pay-off balance is known when the mortgage becomes due, calculated at the time of qualification. This also requires a simple interest schedule, and interest charged will not compound on itself. Although enabling and offering a smaller profit than a HECM, it will also prevent occurrences of negative home equity, allowing FHA insurance premium charges to be reduced. Furthermore, once loans become due, it will be more realistic for a borrower to pay off the reverse program through a traditional refinance without requiring the sale of the home, or a bank owned foreclosure to occur.
Step 16

Yield Spread Premiums, Origination Fees, and other costs associated should be less intrusive than conforming or sub-prime loans. Similarly with the HECM, fees should be calculated based on the appraised home value. The FHA insurance, if in place, should be lower than a standard HECM (currently 2% of maximum $625,500 home value) as integrating term limits will prevent most cases of negative equity occurring and rendering less of a demand on the insurance pool payout to cover lender losses.
Step 17

Lending practices and loan funds should be insured similarly as a HECM is, by the FHA, against future market conditions that may occur. Examples of which are, but not limited to the effect of accrued interest or home depreciation causing negative equity, or failure of the borrower to repair or maintain household in good condition excluding damages to residences normal in wear and tear.
Step 18

Case in point: A home valued at $200,000 with a loan balance of $100,000 is charged 6% fixed interest on a negative equity loan. The total payoff balance due is $130,000 after 5 years, and the LTV will remain low at 65% even if the home value does not increase within that 5-year period.
Step 19

Also, the absence of an age restriction requires a low and manageable LTV at the end of the term limit to allow investor participation. It also will prevent any stagnation to market conditions in new home sales and traditional refinances for too prolonged period of time.
Step 20

Within the Term Limits a borrower will have full rights to sell or refinance the home, or pay off the Reverse Mortgage Loan without investor approval or pre-payment penalty.

A borrower can streamline refinance into a new Reverse Mortgage with additional and sufficient build up in home equity as per predetermined LTV allowances and benefit amounts, (i.e. - 3:1 cash out v. fees ratio).
Step 21

Without any mortgage product that rivals the proposed Reverse Mortgage Program, and with the current absence of Sub-Prime lenders, the competition will primarily be Conforming and Alt-A loan products. The strength of the proposed program is that it allows for a new alternative in mortgage lending.
Step 22

The reputation of the mortgage industry has suffered which allows a new product by a new company to be unveiled that will disassociate itself with the current climate.
Step 23

It's necessary weakness in comparison to other loan products is a negative equity schedule. Due to the current market trends, this issue is less formidable because even traditional loans with a pay-down schedule are in negative equity markets. The difference is that those loans will be foreclosed on due to non-payment, however this program will prevent foreclosure, and help to develop a stable marketplace.
Step 24

Alternative Measures:

The recommendation for a moratorium on foreclosures does nothing to solve the inherent problem for homeowners, or to stabilize the real estate market. The idea only suits to stave off the panic in the marketplace, and to push a deadline further along until it eventually does become required to deal with.
Step 25

The purchase of toxic loans or assets by the government only forces a burden on the taxpayer to be owners of trillions of debt with no possibility of a return investment.
Step 26

Neither option above solves the problem. The term limit reverse mortgage, without an age requirement, will create a new market for lenders to thrive, a stable real estate market, a solution to foreclosure, and an increase in cash flow into the economy.
Step 27

Demographics:

The Primary focus of the Reverse Mortgage Program will be on homeowners in the continental United States with sub-prime adjustable rate mortgages at risk of foreclosure.

The Alternate focus of the Reverse Mortgage Program will include soliciting homeowners in the continental United States in good credit and equity standing to acquire new loans.