by reader Tinman
Failout Part 2 – The Example or “The Uncle Sam Payment Plan (USPP)©”
Previously we put forth a fairly simple solution to the “housing/mortgage/credit crisis”. Let’s follow the solution through using our example above; Mr. & Mrs. Smith, earning $75k/year, have just had their monthly expenses dropped by a whole bunch however, here is where the next phase of the solution appears.
That $750,000 mortgage that was just paid off by the US government is now allocated as a liability of the Smith’s to the IRS. We’re putting them on the “Uncle Sam Payment Plan”© the same as if you have unpaid income taxes.
The USPP© would provide for the following:
• Balance of payoff added as a liability of the homeowners, payable to the IRS
• “Appropriate” payments from the homeowners to the IRS are developed to pay down the principal balance of the now government-held note/property (the interest rate, if any, could be commensurate to the standard IRS repayment option but without the late tax payment penalties added to the balance) to keep a homeowner in the home until sold/refinanced
• Similar to owing the IRS back taxes, any refunds you were to have received are applied to the outstanding balance
Granted, this brings with it a host of other issues all inter-related such as the following questions:
What about the postman earning $40k/year that managed to buy the $1m home?
That, I think, will turn out for itself a better option for everyone (think taxes, insurance, maintenance…). See the example below.
What happens when they sell the house and how much do they have to sell it for?
There is a minor risk of tanking a region’s real estate market by selling too cheaply.
What about insurance, property taxes, HOA dues, maintenance?
The homeowners are still obligated for these items as they are not related to the mortgage.
What if they abandon/destroy the house?
That doesn’t eliminate the debt they owe to the IRS and only makes it harder for the IRS to recoup and outstanding funds via sale of the house.
If they stay in the house and pay down the principal balance can they borrow against the equity?
Removing equity (housing ATM) from a home claimed by the IRS may not be in the best interest of both sides (homeowner & IRS). This is what kept us in trouble over the past 18-24 months.
What about the homeowners who have NOT made a bad decision to buy a house they couldn’t afford?
That’s where the developed monthly payment comes into play. If they really can’t afford it (and all the other components to maintaining home ownership) then they will be working towards selling it.
What about the renters who aren’t even attempting to buy a home now but could otherwise? Is there an incentive for them in this plan?
I guess be thankful you’ve not only made a good decision on your housing but are able to afford where you live. What about being able to use some of the excess funds recouped by the IRS as part of a down payment assistance program?
How do you select those mortgages to receive this government assistance?
Select a starting date and state any non-conforming mortgages from this point forward are eligible?
What about the banks who receive a paid-in-full mortgage as part of this plan? They can just turn around and lend it foolishly again!
• Any mortgage they write post-failout could be limited in the securitization of these new mortgages. Make it so they can’t sell the note to Fannie & Freddie or bundle it into a CDO/CLO.
Let’s try and come up with some rules to handle a number of these eventualities (all of the numbers are a bit arbitrary so bear with them for the moment).
o Monthly payments are determined with a base of a standard 30-year mortgage with 0% interest.
o If necessary, this base payment will be adjusted to income of homeowner to accommodate them continuing to live in the home while facilitating an orderly sale but for only 12-18 months.
• If extended beyond 12-18 months, property reverts to a government owned rental unit with rental rates commensurate for the region/area until a non-damaging sale can be made. The current resident is put into the eviction process if unable to afford the rental rate.
o Standard non-payment procedures are followed as if they had defaulted to a private financial entity.
• Resale rules & requirements
o Selling of the house for less than 35% of the paid-off mortgage is not allowed
• If the market is unable to support a sale otherwise (serious market drop), accommodations are made on the payment amount for existing resident or
• The house reverts to a government owned rental unit with rental rates commensurate for the region/area until a non-damaging sale can be made. The current resident is put into the eviction process if unable to afford this rental rate.
o Any sale of the house for less than the paid-off mortgage but above the 35% “low price” threshold
• Remaining balance of principal is forgiven but reported as unearned income for tax purposes.
• Repayment of taxes for that year can be accommodated again via the USPP© under standard IRS repayment guidelines.
o Any sale of the house for more than the paid-off mortgage
• Proceeds are held by the IRS in an escrow* account until sellers make offer on another home.
• This helps to prevent investors from flipping properties and possibly continuing to support an inflated housing market.
• Proceeds are to be invested in US Treasury securities and any earned interest is kept by the IRS
• Borrowing against property or established equity of property
o This is not allowed. The IRS will be the only mortgage lien holder of record for any paid-off property.
o No further debt instruments are allowed to be written on the property while it’s held by the IRS.
o If home is rendered un-sellable by the occupant, repairs to return it to previous state are added to outstanding balance due.
o Standard processes/procedures available to mortgage holders are utilized.
• Ongoing taxes, insurance and any other financial obligations are paid by homeowner. These other items are not considered in establishing initial monthly repayment amount.
• Non-mortgage payer incentives
o Not sure what can be done here other than a timeframe (from 2003-2008) if you didn’t get a mortgage between those dates you’re eligible for a down-payment assistance (DPA).
o DPA would consist of a 10%-15% bonus of your committed down payment from the IRS.
Where does this ultimately leave us? Notice we’re no longer talking abut the companies being unable to lend anyone money. They should be running better since there’s no longer an issue about defaulting on recently written mortgages or the derivatives written on them. They have an improved balance sheet with capital in hand and an appropriate reduction in portfolio exposure. For those holding US mortgage assets, the elimination of the fear of being called to pay on a CDS or having to mark-to-market your portfolio should improve the appearance of bank’s balance sheets to lenders.
by reader Tinman