Thursday, February 12, 2009

Thoughts Economic

Well so the stimulus package passed or will be passing shortly. Now the government has to figure out what to do with the second half of the bailout money. Yet still there is no plan to help people out with their mortgages. Until this problem is solved the economy is going to be in crisis. I was watching Anderson Cooper 360 last night and Suzy Orman was on and she was saying the exact thing. She talked about the need to help people who are already in their homes and having problems paying their mortgages.

I think these people need to have help immediately. But I have few additional ideas on helping people out.

If someone owns a home the single largest expense is their mortgage payment. With so many people loosing their jobs how are they going to be able to make their payments. Instead of waiting until these people go into default or start having problems help them out now.

I think if you are unemployed you should get a housing allowance. This would be a one time thing to help us get through these difficult times. This housing allowance would be given to the person who was unemployed. The person would not have to own a home. They could be renters. (It’s interesting that there’s been essential no coverage on the rental market. It would be interesting to know what’s going on there.) The allowance would be say $1,000. Now for some people that’s not going to pay the entire mortgage but it would be a help. Also the allowance would be paid to people after they got a job. Just because you get a job doesn’t mean your back on your feet financially. That takes some time. So the unemployed person would get the allowance for an additional three months after they find a job.

Now as to the housing market in general or more precisely to mortgage holders. Most of the talk about helping people out with their mortgages is helping people who are in trouble. That’s too late. If the premise is the consumer is the big driving force in the economy, then it is important to make the consumer feel like they can spend some money. The way to free up some money is to reduce a person’s mortgage payment.

So here’s my idea. You offer any mortgage holder a mortgage loan of up to $250,000 at 4% interest. This would be for three years. There would be an additional year for the interest rate to return to the original rate of the original loan.

What would this do? Free up money is what it would do. In my case I would have an additional $200 a month to spend or save or pay down my debt. The best results is that people would spend the money. Or they might decided to pay down their debt. That’s not the optimal result you’d want. But the faster people get out of debt the sooner they will feel they can spend some additional money.

The question of course is how would it work. Here’s what I had in mind. You wouldn’t be taking out a new loan. The government would come along and assume what ever percent of the loan is above 4% interest. So here’s how my idea would look.

Let’s say you take out the maximum of $250,000. Let’s say your current mortgage rate is 6%. For simplicity’s sake I’m going to base the payment on a 30 year mortgage. Currently the loan at this interest rate your payment would be $1,498.88 a month (according to a mortgage calculator I found on the web). Now under the new plan your interest rate would drop to 4%. Your monthly payment would be 1,193.54. The difference is $305.34. That’s how much extra money the home owner would have each month. That’s also the amount of money that the government would pay each month to the bank holding your mortgage. In year four the loan rate would cycle up to 6% interest. In each quarter of year 4 the interest rate would go up .5%. I think this would help soften the blow of having to go back to the original mortgage payment.

Is this the best bang for the buck? I’m not sure. But let’s do some supposing. Let’s say everyone takes out the maximum loan (this of course would not be the case). It means for each loan the government would be paying to banks that $305.34 each month. Let’s round it and say $300 a month. That means over the course of the year the government would be paying $3,600. That’s $10,800 paid out in the course of the three years. Again for simplicity sake I’m going to leave out year 4.

How far would a billion dollars go under this scenario? Taking the above figures a billion dollars over the course of 3 years would take care of 92,592 mortgages. 100 billion dollars would be 9,259,200.

Here are a few more calculations. I tried to find out the number of households in the United States. I googled and got this site. These numbers are from 2005. I’m going to use this number for the total number of households in the US. 111,090,617. I’m going to do some rounding and say the number is 111,000,000. According to this site 66.9% are owner-occupied housing units. That means there is a potential of 74,259,000 mortgage holders. Now some of these people probably own their homes out right. So again for ease (math’s not my best subject) let’s round to 74,000,000.

Next I’m going to take the total number of mortgage holders and see how much my plan would cost the government if everyone of them participated in the plan. Drum roll please the total would be $799,200,000,000. That would be the cost to the government but that is also the amount of money that would be freed up for Americans to spend.

Would this solve the problems that we are having? I don’t know. What I do know is at least under my plan everyday Americans would be getting help which so far they have not gotten at all from any proposed plan.

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