February 25, 2009
I’ve spent some time thinking about the money being thrown around at this crisis and that crisis. The crisis du jour is, of course, the housing crisis. The Obama administration wants to give money to help people pay their mortgages. While it’s not clear exactly how this plan will work, I’m sure it will be an abject failure. So far, that’s what all the other plans seem to be. I have an alternate plan that I think will accomplish the goals stated by the administration and reduce the risk for the banks.
Instead of handing out money to banks or mortgagees, I propose the government provide tax credits to lenders who refinance mortgages so that they are more affordable. The credit would take the form of a percentage of the total refinanced value. However, the lender could only take the credit if the mortgage was current after one year. This would do two things:
1. The lenders would have the incentive to refinance the loans to more affordable terms. Since they have to wait one year to get the credit, they will want to make sure the mortgagee can pay.
2. The lenders won’t try to refinance risky loans. They won’t want to risk their money not knowing if the loan would be current at the point of the tax credit. This will do much to improve the health of the lending industry.
I can foresee this being extended into new mortgages as well. The benchmark for receiving the credit might be further down the road just to make sure that the loans are good ones. This could have the added effect of encouraging lenders to make a few loans that, on the surface, might seem risky. It might entice them to work out the terms in a way that is beneficial for both the parties.
A final provision would be that, at selected benchmarks, the lender could take other credits. Again, this would encourage lenders to write loans that are affordable for the customer. In fact, the program could be structured so that lenders could ultimately recover a large percentage of any given loan through the tax credits.
This plan isn’t perfect, but I would rather see this type of attempt to revive the industry rather than just throwing wads of money at it.
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