Sep
23
The Simple Solution To the Housing Crisis – Eliminate Usury Mortgage Rates
Filed Under Main Content | 2 Comments
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…
Sep
18
Fixing The Economy by Putting Money Back in the Hands of the Citizens
Filed Under Main Content | Leave a Comment
I want to elaborate on one of the comments posted by Doug Newberry on his blog post "The Newberry Doctrine"
http://blog.the-market-toolbox.com/130/the-newberry-doctrine-how-to-fix-the-economy/
2) I would repeal all income taxes on people making less than 250k per year and make that retroactive back to January 2008 and refund all taxes collected since that point.
Now finally someone is making a lot of sense. The way I see it is that the "small guy", the average citizen working to make a living can’t possibly support the massive debts and deficit the "system" has created. The only way for the government to collect enough tax to get itself out of this mess is for "business" to be profitable and pay tax on those profits. With the economy in it’s current state, tons of businesses are not going to be profitable, hence will pay no tax. Look at all the negative earnings reported across all sectors of the economy. The companies will report losses and there is no tax on losses.
To think the taxes collected on average individuals will make up for this is crazy.
What is needed right now is to put extra money back in the hands of ordinary working people, the masses. When the citizens have more money they spend it at the businesses who then become profitable again and pay the much needed taxes to support the bloated "system. The easiest way to accomplish this is to eliminate the tax on income for people making less then 250k, heck at least 100k. The payroll tax in my opinion is unconstitutional to begin with. The idea of the governments "right to tax" was originally framed as a tax on "commerce", not a tax on individuals income derived from their personal labor. Be that as it may the system has become so convoluted that the idea of repealing income tax is scoffed at by anyone except the average citizen. Do you think if one of the Presidential candidates came out and said " I believe working families making under 250k a year should not pay any income tax" would result in a landslide victory? I do. Everyone wants and needs a raise and this is the way to do it. It won’t cost businesses anything not to hold income tax out of the paychecks of their workers.
Right now there is no tax on "low-income" people but the threshold needs to be raised to encompass the average person. If say anyone making less than 250k or heck even 100k got their entire paycheck every week they would immediately be able to start turning their financial situation around. This would immediately create a lot of debt reduction, saving and additional spending in the real economy which would support business. Corporations would then become profitable or more profitable and they would be in a position to pay the tax. Tax revenue would go up dramatically on "commerce" not on the backs of average Americans.
The economy is supported by businesses selling goods and services to consumers. The consumers are feeling pain right now because of the economic downturn and are clamping down on spending. They are in debt and taxed to death everywhere they turn. Repealing the income tax on working class people would have an immediate and significant benefit and like the "trickle-down" theory, the economy would get a big boost right away.
Say when you get your check this Friday there was no income taxes held out. You get your whole paycheck (less Social Security). All of a sudden you got a nice raise and are able to do productive things with it. Like pay down debt, buy some stuff and maybe even save a little bit. We can’t go on with a negative savings rate in this country and the idea of taxing individuals income is crazy to begin with. Simply raising the threshold where citizens have to pay income tax would turn things around. 250k maybe for a family or 100k per individual would be the right place to set the bar.
It is indeed a simple idea. Put the money back into the hands of the "masses", ordinary citizens will then in turn give a much needed boost to the overall economy and the benefit will be profitable corporations paying lots of taxes on "commerce".
Good idea Doug. Payroll tax on wage-earners is a ridiculous thing to begin with. If I collect wood and build a fire so I don’t freeze to death I should not be taxed on the fruit of my labor. If I collect wood and sell it to others then I agree tax can be collected on the "commerce". Individual income tax must be eliminated and made up with Corporate tax and tax on commerce.
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