Give owners 5% mortgage and watch economy thrive

FDIC Chairwoman Sheila Bair deserves credit for proposing a plan to have the government help delinquent homeowners. At least she is trying to solve the mortgage component of the economic crisis and get the economy moving again, which is more than can be said of Treasury Secretary Henry Paulson. Paulson says he supports the FDIC’s $24 billion foreclosure prevention plan, although he is unwilling to finance it from the $700 billion Troubled Asset Relief Program (TARP) as Blair recommends.

Under the FDIC’s plan, the government would guarantee 2.2 million modified mortgages through the end of 2009. As you might suspect, most of the loans are high-risk because they were made to borrowers with weak credit or small down payments. Homeowners’ monthly payments cannot total more than 31 percent of pretax monthly income. The FDIC estimates that 1.5 million homes would be saved even if a third of borrowers defaulted on the modified loans.

Blair proposed her plan to supplement one announced by Fannie Mae and Freddie Mac, which is designed to help homeowners who are at least three months behind on their home loans and who owe 90 percent or more than their home is currently worth. Help comes in two forms under this plan: The interest rate is reduced so homeowners pay no more than 38 percent of their income on housing expenses, and the loan term is extended from 30 to 40 years (some principal can be deferred interest-free).

The need for an immediate foreclosure protection plan is critical given that Fannie and Freddie own or guarantee nearly 31 million U.S. mortgages (about six of every 10 mortgage loans outstanding). Paulson’s unwillingness to help homeowners is inexcusable, but what should he do?

1. Paulson should require all banks (or at least all banks that accepted TARP money) to immediately reset every mortgage on their books to a 5 percent fixed rate. This can be programmed quickly since all loans are included, and importantly, does not merely benefit homeowners who are delinquent on their loans at the expense of homeowners who are current on their mortgages and have handled their finances responsibly. All homeowners with a mortgage greater than 5 percent benefit.

This will immediately put extra spending money in the pockets of most homeowners, and will convert all adjustable-rate loans into fixed-rate loans so families can budget their finances more accurately going forward. In my own case, resetting my mortgages to 5 percent fixed rate will save my family about $215 a month.

2. Paulson should require all banks (or at least all banks that accepted TARP money) to immediately freeze foreclosure proceedings for one year, until the end of 2009. Additionally, banks should reverse all late fees and penalties, and give homeowners until the end of 2009 to make their loan current by catching up on any late payments. Loans that remain delinquent at the end of 2009 should be allowed to be foreclosed. Homeowners who are delinquent can use the money saved from having their loans reset to a 5 percent fixed rate to catch up on late payments with an understanding that any delinquencies that remain outstanding after Jan. 1, 2010 can be immediately pursued via foreclosure proceedings.

3. After banks reset loan rates to 5 percent, homeowners should be allowed to request a free one-time extension in their loan term to a maximum of 40 years, regardless of whether they have equity in their home or owe more than the house is worth. This would give all homeowners an incentive to stay in their homes and ride out the current housing downturn, as well as a reasonable shot at regaining lost equity as the housing market recovers.

Unless there is an easy way to identify investor property, the three recommendations should apply to owner-occupied and investor property, as well as first and second mortgages, to facilitate easy and quick implementation. I know it is not fair to bail out investors, but this is no different than bailing out banks. My family will save an additional $70 a month if investor property is included, so we will save a total of $285 a month under this plan.

The three recommendations should immediately increase consumers’ cash flow because the resetting of mortgage rates to a 5 percent fixed rate will generate a monthly stimulus for almost every homeowner with a mortgage via the reduced mortgage payment, and this stimulus can be spent immediately.

This is not rocket science, and need not be approached like it is. It is past time to act to save homeowners and get the economy moving again.

> Mark Dawkins is associate dean for academic programs in the Terry College of Business at the University of Georgia.