My Mortgage Plan
The Obama administration is working on a mortgage bailout plan. Supposedly, they only want to help the people who are responsible home owners. That's a good aim. Given that 41% of modified mortgages end in default, we shouldn't send good taxpayer money after bad results. If the administration is sincere about their desires, I have a proposal.
We should only help homeonwers who have either made a significant investment or spent a significant amount on their house. Here's how I define those terms.
A significant investor is someone who has equity equal to at least 20% of the purchase price of their house. For example, someone who took out a loan for $200,000 would need to have already paid off $40,000 in order to qualify for assistance. Anyone who owns less than that, isn't really a home owner -- they're more like renters with extra privileges. We should only help those who have invested a significant amount in their homes. They've already proven that they can meet payments and put considerable resources into their homes. They're likely to continue doing so, given a little help.
A significant spender is someone who spent at least 6 months gross salary on a downpayment. They're someone who has demonstrated an ability to scrimp, save, and plan for the future. They've locked up a considerable amount of capital in their house and made sacrifices to do so. They've already demonstrated an ability to manage their money and defer spending. They're likely to continue doing so, given a little help.
Both of these criteria would apply no matter what the current value of the house is. Those who are prepared to stay in their house long-term shouldn't be worried about whether or not their mortgage is currently underwater. It may yet rise back above water. And if it doesn't, the government shouldn't be worried about helping them earn a profit on their investment. Rather, our sole focus should be on keeping responsible homeowners in their homes, if at all possible.
These two criteria can help us identify who the responsible homeowners truly are. What happens after they've been helped over their current financial short fall is up to them.
What do you think?
(Updated on Feb 25, to reflect James' suggestion.)