Example 3: How the AllStreets Bailout Plan Affects the Extremely Upside Down Properties
The AllStreets Bailout Plan was designed with one primary goal in mind, to relieve the excess mortgage debt that has left some 25% of homeowners upside down on their mortgages. It does that with unsecured direct federal loans equally shared by homeowners and their lenders. It also provides fair equal access to homeowners who have little or no mortgage debt and to adult American citizens who don't own properties. See Example 1 and Example 2 for how it cures typical homeowners in large metro areas who have had 20% drops in their property values but were not made severely upside down with their mortgages by the drop. The question arises how it would benefit homeowners in some states where some properties have dropped 30-50% in value, such as California, Nevada, Arizona, and Florida. Of course, whether the plan would eliminate all negative equity depends on how much mortgage debt the homeowners might have.
Under the recently updated plan, the AllStreets federal loan funds 60% of the drop in value of each property from their peak values. That means homeowners who had a 50% drop in value would get a mortgage payoff equal to 30% of the peak value of the property. Thus, only those who had total loans-to-value of 70% or less at peak value would be cured from negative equity. As an example, if a property was worth $600,000 at its peak, and dropped to $300,000, the loan would pay down $180,000 of the mortgage principal equal to 30% of the peak value. If the property had 100% financing at peak value, that would mean there were $600,000 in loans. The paid down principal would be $420,000, still $120,000 or 40% more than the value of the home. Though the plan doesn't cure an extreme case like this, at least with the payoff there's a better chance that the borrower can cover $120,000 of negative equity than $300,000, and eventual increases in the property value would cover the negative equity of $120,000 much faster than it would cover $300,000.
Of course it isn't written in stone that the plan must cover only 60% of the drop in property values. We've run studies of levels of mortgage relief provided for homeowners for various levels of drops in their property values and various levels of financing at peak valuation. We chose the 60% of the drop because at that level of federal financing any homeowner who had 90% or less of value financed at peak valuations, and a drop of 20% or less, the average drop for all U.S. homes in large cities, would be rescued from negative equity. That level seemed the minimum level necessary to significantly relieve the mortgage and lender problems. At that level the value of all homeowner loan authorizations would come to $2.8 trillion, and we didn't want that part of the program to get much larger.
What the foregoing shows is that many of the homeowners in states with large drops in value will not be saved by the plan at 60% funding of the drop in value. As we pointed out in our original plan, it may be necessary to scale the level of financing up for larger than 20% drops in value to prevent many foreclosures in those areas. For example, for areas where values have dropped 50%, it may be necessary to provide 75% funding of the drop in value in which case homeowners who had 80% or less financing at the peak value will be made whole. It might turn out that the large scale effects of the plan will provide the largest increases in home values in some of the areas that had the largest drops, so that those with more than 80% financing at peak levels will get whole in a reasonable period of time.
Under the recently updated plan, the AllStreets federal loan funds 60% of the drop in value of each property from their peak values. That means homeowners who had a 50% drop in value would get a mortgage payoff equal to 30% of the peak value of the property. Thus, only those who had total loans-to-value of 70% or less at peak value would be cured from negative equity. As an example, if a property was worth $600,000 at its peak, and dropped to $300,000, the loan would pay down $180,000 of the mortgage principal equal to 30% of the peak value. If the property had 100% financing at peak value, that would mean there were $600,000 in loans. The paid down principal would be $420,000, still $120,000 or 40% more than the value of the home. Though the plan doesn't cure an extreme case like this, at least with the payoff there's a better chance that the borrower can cover $120,000 of negative equity than $300,000, and eventual increases in the property value would cover the negative equity of $120,000 much faster than it would cover $300,000.
Of course it isn't written in stone that the plan must cover only 60% of the drop in property values. We've run studies of levels of mortgage relief provided for homeowners for various levels of drops in their property values and various levels of financing at peak valuation. We chose the 60% of the drop because at that level of federal financing any homeowner who had 90% or less of value financed at peak valuations, and a drop of 20% or less, the average drop for all U.S. homes in large cities, would be rescued from negative equity. That level seemed the minimum level necessary to significantly relieve the mortgage and lender problems. At that level the value of all homeowner loan authorizations would come to $2.8 trillion, and we didn't want that part of the program to get much larger.
What the foregoing shows is that many of the homeowners in states with large drops in value will not be saved by the plan at 60% funding of the drop in value. As we pointed out in our original plan, it may be necessary to scale the level of financing up for larger than 20% drops in value to prevent many foreclosures in those areas. For example, for areas where values have dropped 50%, it may be necessary to provide 75% funding of the drop in value in which case homeowners who had 80% or less financing at the peak value will be made whole. It might turn out that the large scale effects of the plan will provide the largest increases in home values in some of the areas that had the largest drops, so that those with more than 80% financing at peak levels will get whole in a reasonable period of time.
Posted by The Mortgage News at 2/16/2009 3:31 PM 
Categories: upside down mortgage, upside-down properties, mortgage modification, AllStreets Bailout Plan
Categories: upside down mortgage, upside-down properties, mortgage modification, AllStreets Bailout Plan
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