Wednesday, March 04, 2009

The Van Niel mortgage proposal

So I was talking with Jeff Van Niel this morning, and he came up with a simple and effective mortgage proposal for the rest of us--those of us who are current on our mortgage payments, who have jobs, but who are underwater because of plunging home values. (See here for my op-ed at JURIST on this subject.) His plan is simple and elegant:

Banks w/borrowers who are underwater but current should offer the following deal:

They will reduce the interest rate on the mortgage to a lower rate (at least what the folks who have defaulted are being offered, thanks to the bailout) and agree that, for every X years that the borrowers remain current on their loans, the banks will reduce the outstanding principal amount of the loan. Over time, everyone wins: the banks won't own the underwater houses, housing prices won't continue to plummet, and borrowers will have an incentive to stay current.

Common-sense idea, right? So why aren't the banks doing this?

And while I'm at it, why can't both political parties move more toward the center and work toward a more moderate proposal? I'm worried that the bailout isn't going to work, that we'll be on the hook for far too much money, that the proposal creates all sorts of moral hazard issues, and that -- even though I believe that there are good intentions on both sides -- the political incentives for both sides to dig in their heels far outweigh the long-term consequences of people's decisions.

I hope that the air in Washington isn't so different from the rest of the country that moderates of both parties are suffocated.


Anonymous said...

Stoip begging for a handout and pay what you agreed to pay. Sheesh!

Unknown said...

Dear non-proofreading Anonymous: If you actually read the post (or my previous posts), you'd know that we do, in fact, continue to pay what we owe. Every time.

Anonymous said...

Anonym-ass - Your reading skills need some help. She said she timely pays her bills, incuding her mortgage. I see no begging for a handout, only someone trying to find some mechanism to stop the moral hazzard of giving handouts to those people that overbought or knowingly overcommited themselves on a house that they could not afford.

Nancy should stop letting bozos like this guy post on her blog....

Anonymous said...

My discussion with Nancy had nothing to do with asking for a handout. Anonymous #2 got it correct.

Let me set the stage concerning Nancy and my discussion. I pay my bills every month in full, meaning that even though I have credit cards I carry no balances on those cards from month to month. My house is underwater, and not just by a little bit. I DIDN'T buy at the peak, but close enough to it to now that I now have a house that is valued close to $130,000 less than the balance of my mortgage. I DIDN'T buy in a crappy neighborhood or one where houses are foreclosed regularly. Many neighborhoods in my town have been hit much harder than mine when it comes to house devaluation. I can only imagine what some of those home owners think when they look at how far they are underwater.

However, there does come a time when you have to decide is my "pristine credit rating" worth $130,000+? The moral hazard that Nancy identified in her blog is one where you let everyone off the hook for their bad decision to buy more than they could afford to buy, buying for investment purposes, or buying with one of those "Interest only" mortgages. When those folks get bailed out, I wonder if anything of value has been learned. What is the lesson they were taught. Granted, the chances are extremely good that I'll continue to pay ALL of my bills on time and in full, but I have got to tell you that there is a growing feeling in folks like me that it would be MUCH easier to just stop paying my mortgage for 90 days so that too could get a nice principal reduction AND reduced interest rate on my house.

My step down plan was an effort - by me - to find an equitable way to allow folks who are seriously underwater in their primary residence, but want some kind of break long-term, to stay where they are and continue to pay that over-priced, soon-to-be-higher-than-necessary interest rate on their mortgage. I’m sure there are other, better plans out there. I’m all ears. So far, I’m not hearing ANYTHING that even considers easing some of the punishment that I’m going to feel if I try to sell my house in the next 5-10 years, simply because I pay my bills on time.

I'm NOT talking to folks who have lost their jobs, or been RIF'd due to the recession. We both know that your situation is NOT your making. I'm talking about the folks who knowingly entered into a deal that was “too-good-to-be-true”, but whose deal is now biting not only them but also me...

K said...

I agree that the "Van Neil" plan seems to better address the actual problems presented by underwater borrowers than plans previously and currently being floated by the Administration and other experts and commentators.

perhaps I am in the minority, but I think the moral hazard talk is just "Santelli-ism" in different clothing. Do scholars really believe that moral hazard concerns are serious enough to trump the need for a working bailout? I do not have citations to the actual academic research, but The 2/9 issue of The New Yorker had a good wrap up on why the moral hazard concern is rather weak.

Anonymous said...

Boo hoo. The poor DINK couple wants taxpayers to reduce their principal and interest on the loan they agreed to!

I applaud the selflessness of Mrs. and Mr. Rapaport. I would be proud to pay taxes to pay down their mortgage.

Anonymous said...

C'mon anon! Nancy doesn't want the taxpayers to pay down her mortgage. She wants the banks to reduce her principal.

Why should affluent professionals be required to pay the full purchase price of their homes. It's not fair!

My "Van Niel 2.0" proposal is for banks to reduce all mortgage loans by, say, 10%. Why should people who pay their loans have to pay their loans?

Unknown said...

I think that some of the "Anons" are missing the moral hazard point, plus the point that the banks would actually do better, in many cases, by reducing the principal to encourage folks w/o equity not to walk away.

We aren't the "walk-away" types--but we can see why some folks are doing just that.

Refinance Mortgage said...

It was a nice read. Thanks for the info.

Unknown said...

With the drop in real estate prices both sides ought to bear a portion of the loss. The Van Niel plan is a way to reduce the burden on the buyer and help insure that the buyer will continue to make payments and not walk away. Right now banks aren't willing to renegotiate, preferring to take a few losses while hoping that most people will be afraid of damage to their credit rating so that few actually do walk away from the loan.

To change that, we need more underwater mortgage holders to walk away from what is no longer a good deal. By continuing to pay your mortgage, the bank has no incentive to renegotiate the deal. Why would any rational buyer pay $130k (plus a significant amount of interest) more than a property is worth?

If people walk away from significant numbers of underwater mortgages, the question will be whether society (us taxpayers via our government) wants to save the banks from the loans they made on property that has now dropped substantially in value.

This is not a simple issue of a government handout to mortgage-paying citizens.

Joseph C. McDaniel said...

Well, no matter what approach is used to fix the current economic meltdown, this one makes more sense than most I've heard.

On the other hand, because it makes so much sense, it would probably get talked to death in Washington!