This crisis is up for grabs. Who do we blame? Bill Clinton for his policies and support of getting poor people loans? The sharks in the mortgage broker world who convinced people that they could afford the house they wouldn't be able to afford in 5 years? The person who signed the contract without running the numbers and saying “If interest rates go up 3%, I'll be broke...” All of them. It's everyone's fault who's involved. This is one of the reasons I agree with Ron Paul and feel he should have been president. I'm sorry that that won't happen now. Mr. Paul would like to see less government involvement in issues like this for one reason: it's high time American citizens took accountability for their own actions. This includes the people who got ripped off because they didn't bother to read a contract as well as the people who gave them the contract. But now for a solution to all of this. It's simple really – all you have to do is...
...buy a house.
If you are a person who can afford to buy a house, you can make money and sell the house the day you close on it. Since prime borrowers, people with better credit, can buy homes and still get great fixed rates, they can then pass this on to sub-prime borrowers, and make money on it at the same time. Buyers make money, who in turn become sellers to the original seller, who in turn gets to keep their home, or at least get an extension to try and keep their home at a fixed rate. Everyone's happy. It makes money for the buyer and probably saves money for the original homeowner who may have gotten so far behind with a rising ARM that they'd lose their home anyway.
How does it work? Here's an example:
Homeowner A has an ARM. Their fixed 3 year rate of 8% has now gone to 9.95%. On a $150,000.00 loan that payment is around $1,100.65 a month. Probably a little more since you have to add insurance, maybe PMI (private mortgage insurance), etc etc.. so maybe $1,200.00 a month. The rise in interest to 9.95% is now going to raise that payment $210.17 a month (roughly – remember... these are estimates). Now Homeowner A has a $1410.00 a month payment. Can we trade that for no electricity and no cable? The cable maybe, the electric – not so much.
Let's assume the value of the house to be around $185,000.00 – since Homeowner A purchased it and put some money down.
Given current market conditions, the investor – Buyer B can still pretty much get approved to buy the house at $185,000.00, even if it lost a little value. Values, btw, will always go up. Sometimes it just takes a while. This is why real estate is so appealing to long term investors.
Investor B buys the house with no money down @ $180,000.00 for which the original mortgage must be paid off. This means that about $147,500.00 comes out at the closing table, plus maybe another $4,000.00 in closing fees and a payment to three lawyers (The lawyers for A, B and the bank) for around $4,000.00. This leaves $24,500.00 on the table. Personally, I'd take a smaller up front payment and more money over time, and use about $6,000 to shave a couple points off of the interest. Now let's say that Buyer B gets their rate @ 6.5%, which is about the going rate. This means that the payment is back down to about $1,200. Now we see why paying the points will help. By paying down points, you shave a percentage off of your interest rate. Buyer B could probably get it down to 6% with a
payment of $4,000.00 or so, lowering the monthly payments to the bank by roughly $121.00.
Now the wraparound. A wraparound mortgage is one in which the owner of the home (which is now Buyer B) sells the home back to the original owner (Homeowner A) – possibly even at the same closing table. I honestly think you should get a lawyer, but if you use the same lawyer you should just have them draw up the paperwork, wait til the bank and banks lawyers leave and do two closings at one table. It'll cost a couple thousand more on the deal in question.
Buyer B sells the house on a wraparound mortgage back to Homeowner A at a fixed rate of 7.5% which will have a payment of about $1,260.00 per month. BAM! Homeowner A keeps their home. Buyer B walks away from closing with about $16-18,000.00 in their pocket and Homeowner A's payments have gone back down to only $60/month over the original payment WITH A FIXED RATE!
I've looked around. No one else has published this, or at least I can't find it. I don't know why not. I just saved at least a good 20% of the homeowners who are in trouble or whose payments have gotten out of hand, and made a lot of people a lot of money. Selling houses the day you buy them. Keeping homes and lowering payments. Damn I'm good.
If anyone has reasons this can't work in a specific situation, please post them in the forum (link at end of story). This will not apply to every situation, of course, but it could help a lot of people right now. Even people who have had their homes a long time and just had a bad ARM. The longer you've owned your home, the more lucrative this can be for everyone involved.
I think it's time to stop worrying about who's to blame in this terrible time. The time we spend arguing this in court rooms is time that people will be spending moving out of the homes they've lost. I always try to tell my kids the right order to do things is :
A) Fix problem. B) Blame yourself. C) Blame someone else.
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