I want to elaborate on a concept originally described in the Newberry Doctrine.
http://blog.the-market-toolbox.com/130/the-newberry-doctrine-how-to-fix-the-economy/
First, lets assume that someone owns a median home in America or wants to buy a new home. We will say the home is valued at 220k and the borrower owes or wants to borrow 200k.
To get a benchmark on the payment we will pretend we have a rich uncle "Ben" that is going to loan us 200k with no interest and we will pay him back over 30 years as in a traditional mortgage.
So we take 200,000 divided by 360 payments and we arrive at the monthly payment of $555. So if our rich "Uncle Ben" would give us a 0% loan for the 200k, the payments would be very reasonable at $555 a month. Heck, most people could afford that. Anything over the $555 a month constitutes interest payment.
The way the system works now, with a 6.5% interest rate, for every dollar we borrow we have to pay back that dollar plus almost two more. Therein lies the problem. A traditional mortgage in my opinion constitutes "usury". Usury is a word that seems to have disappeared from our vocabulary, but is at the heart of the problem with the mortgage crisis. When someone takes out a mortgage they end up paying triple the amount borrowed and worse yet the interest is front-end loaded.
Let’s take a look at a traditional mortgage using our assumptions and focus on the monthly payment. Remember anything over $555 a month is interest.
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Hmm..ok. So we are borrowing 200k and paying that back plus roughly $250k in interest. Also remember that 6.5% interest rate is considered very low by historical standards. Notice that the actual monthly payment is $1,472 is 2.65 times the zero interest loan. We won’t get into how most of the initial payments are interest in the first few years since a traditional loan is front-end loaded with interest. That even makes it worse.
Now, lets look at the solution to the problem. It is very simple. Now that the Feds are in charge of Fannie and Freddy and in the home mortgage business, let’s let the FED give anyone and everyone a 2.5% interest home loan. Let the FED refinance every home loan up to 200k at 2.5% and eliminate all the middle men. More on this in a bit but first let’s look at how this would look to the average person as far as the monthly payment. Remember $555 is our benchmark monthly payment and everything over that is interest.
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Now we are getting somewhere. With a 2.5% loan on the median home the payments would be $1000 (including property tax), which would save almost a third from the monthly payment. Hey do you suppose that if the typical struggling homeowner had their monthly payment drop from 1500 a month to 1000 a month they would be a little more solvent? Perhaps they can barely afford the $1500 and are getting behind and in risk of default, but if their payment was only $1000 they could afford to keep the house and even make their car payment.
My opinion is that the "housing crisis" is really a "mortgage crisis" caused by the greed of the institutions that devised a system whereby they charge "usury" rates to finance homes.
The way to fix this problem is to make everyone involved more "solvent". If the homeowner could refinance at 2.5% their monthly payment would drop immediately by a third, therefore they are much more likely to be able to afford the payment. The holder of the mortgage is much more likely to get paid back and the risk of default drops substantially.
Again, I will say the solution is simple. Let the FED refinance every OWNER OCCUPIED home at 2.5% and write new loans to first-time home buyers at 2.5%. Let them do this for all homes valued at or under the Median Home Price.
Let the banks charge a "fee" say $1500 to write up the paperwork and pass the loan right through to Fanny/Freddy and eliminate all the middle men and institutions that caused the problem to begin with.
Low interest rate home loans are what resulted in Japan when they went through a similar situation and it seems like such a simple solution. Fanny and Freddy were underwriting almost half of the loans in America anyway so what’s the big deal? The FED loans money to the banks at 2% right now so what is the problem with loaning money to the people at 2.5%
The way to solve the economic problems we have today is to put money back into the hands of the people, the citizens, the masses. The sheer number of people that this would benefit would have an immediate and profoundly beneficial effect on our economy.
What about the bond holders that were counting on the "usury" rates? Well, that’s simple too. They will get back the principal and therefore they are made whole too. It’s obvious at this point people are worried about return of capital more than return on capital and with this solution they get their capital back. People are a lot less likely to default on a mortgage when their payment is 1/3 less.
Part of the solution to our economic problems is re-capitalizing both individuals and institutions and this would go a long way toward doing both. The current entity holding the mortgage when the FED refinances it at the new lower rate, simply gets paid back the outstanding balance owed at the time and now they are solvent as well. Everyone is flush with cash because the "usury" has been removed.
The current mortgage system is a scam because of the incredible amount of interest charged over the life of the loan and the fact that the interest is front-end loaded. Letting the FED refi everyone at 2.5% is the solution. They still get 50 basis points more than they are loaning it to the banks for and so essentially the taxpayers are underwriting this new deal anyway and making money on it.
I know there are some other fine points I haven’t covered here but conceptually this is solid and makes a lot more sense that what is being discussed. I say to solve these problems you have to "bail out main street" and then let "trickle-up economics" solve the problems on Wall Street.
At 2.5% I might join the ranks of the 1st time home buyer. I refuse to pay triple the amount that I borrow with the present mortgage system. I will just rent…
2 Responses to “The Simple Solution To the Housing Crisis – Eliminate Usury Mortgage Rates”
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I will just rent too because this is mind boggling.
Then don’t buy more than you can afford. If you don’t take 30 years to pay off a loan, you won’t pay triple the amount.