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Details on how the Van Niel mortgage proposal would work.

By Nancy Rapoport

Here's how the Van Niel mortgage proposal would work.

Banks with borrowers who are underwater but current on their loans should offer the following deal to those borrowers:

(1)  The bank reduces the interest rate on the mortgage to a lower rate (at a rate at least equal to what the folks who have defaulted are being offered, thanks to the bailout). 

(2)  The bank agrees that, for every "X" years that the borrowers remain current on their loans and live in the house (no "spec" properties--just actual homestead-type homes), the bank will reduce the outstanding principal amount of the loan by "Y" dollars. 

(3)  The borrowers, in exchange for the principal reduction and reduced interest rate mortgage agree that if, they sell the house within "Z" years, they will give any profits made on that sale to the bank.  (The potential profit gives the bank an incentive to "deal"-- if house prices improve, it might recoup at least a portion of its lost interest on the reduced interest mortgage and principal reduction.)

Example:  House is bought for $300,000; it has a $210,000 mortgage @ 6% for 30 years; borrowers put 30% down on the house.  House is now worth $125,000, and the balance due on the mortgage is $200,000.  (Welcome to Las Vegas.)

Bank agrees to reduce the interest rate by 1% (revised rate is 5%) AND to reduce the principal on the note by $5,000 per year for 5 years.  At closing,  the house is valued at $125,000 and the mortgage is $195,000 @ 5% for 30 years.

After year 1, mortgage is paid down to $192,123.04 (less $5,000 = $187,123.04).

After year 2, mortgage is paid down to $184,177.59 (less $5,000 = $179,177.59).

After year 3, mortgage is paid down to $176,165.50 (less $5,000 = $171,165.50).

After year 4, mortgage is paid down to $168,089.17 (less $5,000 = $163,089.17).

If the borrower sells the house in the first five years for any reason, the bank gets any profit made by the sale.  At end of a 5-year period, the house may still be worth $125,000 (maybe the value increases--or maybe the borrower is in Las Vegas, so the "floor" on house prices keeps falling--sigh), but the principal on the mortgage has been reduced to a much more manageable  $163,089.17.   

The homeowner is significantly closer to breaking even, and has much less incentive to hand the keys back to the bank and simply walk away. 

One more advantage:  the bank doesn't have to write down the value of the home in one big lump--unlike a foreclosure or short sale. 

Using future bailout money, if any, to buy down the mortgages of underwater homeowners who are current on their mortgages is as least as productive a use of the money as is giving the bailout money to delinquent NINJA homeowners who have no chance of keeping their houses in the long run.

Over time, everyone wins: the banks won't own the underwater houses because the homeowners will have an incentive to stay in the houses (without feeling like dummies for honoring their obligations) and housing prices won't continue to plummet because there will be fewer neighborhoods with massive foreclosures.

And now you know that part of the reason that I married Jeff Van Niel is that he's very, very smart.

Full post as published by Nancy Rapoport's Blogspot on January 07, 2011 (boomark / email).