Dear Senator Warren. Some time back (before you became a Senator I believe) I posted a diary here regarding mortgage bankruptcies, but alas it never really gained traction nor had it a potential champion (if the idea is deemed worthwhile, of course) to present the idea to who has a voice that would actually be heard... until you came along. I was going to send the idea through your website, but the email option doesn't seem to be working for me there. I looked at your Facebook page as a place to post it but that didn't seem doable. However, I've seen you post here as a fellow Kossack, so I'm going to take a gamble and hope there's a chance that this may reach your eyes. It's an idea that I've stewed on for a few years now that may be able to fix the mortgage bankruptcy crisis far too many Americans have to face, will strengthen the middle class, lead to far more home ownership for Americans, create jobs, strengthen the economy, reduce the deficit,... yeah, it's that good. (In my mind at least...)
In a nutshell, I want the Federal government to get into the mortgage business. Please accompany me below the orange squiggle of hope for details.
We all are aware of the problems with too big to fail banks and their mortgage practices, but there's another 500 pound gorilla in the room that is getting ignored while the 600 pound one goes on it's rampage that is equally responsible for so much of the mortgage bankruptcies we see happening, and that gorilla is called compound interest. Compound interest, even at "low" rates, can nearly double the total cost of the loan over it's lifetime and is a huge drag on the whole economy of the country. So, to get to the details (finally), I propose that the Federal government offer mortgage loans at two rates of 20% and 25% simple interest.
Sounds like a lot on the surface, but it isn't in comparison. Take for example a $300,000 loan. Not including extras like property tax or PMI, a $300,000 loan (after down payments) at 4.5% compound interest calculates to nearly $550,000 paid over the lifetime of a 30 year loan and monthly payments of over $1500. That's a significant portion of a lot of people's incomes per month. However, the same $300,000 at 20% simple interest tops out at $360,000, saving families almost $200,000 over the lifetime. That has the lovely effect of reducing monthly payments to $1000.00 per month, putting over $500 per month back into the pockets of families. In addition, whereas compounding loans front load the interest payments, simple interest loans divide the interest evenly into every payment (80% of every payment goes to principle!). This results in a much faster growth of equity for the homeowners.
So right there is the very heart of the idea. Federal government issued and controlled home mortgages offered at simple interest rates of 20% and an optional 25%. Now, what's with the 25%? This could be an option for people where, if they choose, they pay an extra five percent interest which, entirely, is deposited into an interest bearing savings account in their name. I see this account serving in an interesting way... someone may, if they have the money accumulated in their account, opt to make a monthly payment from the account instead of having it withdrawn from their primary bank accounts. Say the holidays roll around and someone wants a little extra money to lavish me with gifts they could use the savings account to make the December payment. Or, they could let the account grow enough to the point where there's sufficient cash to pay off the loan completely, thus getting out of the loan earlier. Or, finally, they can receive the content of the savings account at the end of the loan as a lump sum. It's an optional idea, but one that I'm rather fond of.
One other idea I'd like to see tied to this is to flip the method of determining payments around. Rather than have the monthly payments be determined by the length of the loan let's have the length of the loan be determined by the amount of monthly payments someone can reasonably afford to make. Say for example there's a cap of 30% of your monthly income allowed for payments. If someone can only afford the aforementioned $1000 per month then the length of the loan is 30 years. If someone can afford $2000 per month (and be below or at the 30% threshold) then the length of the loan would be 15 years. You keep the threshold to keep people within their means and you give the flexibility within that threshold to suit the individuals (the family that can afford the $2000/mo may choose instead to pay $1500/mo, keeping the loan below the 30 year cap).
As I see this, the 20%/25% numbers are just baselines I pulled out of my head and can be changed. The idea is to have the program generate enough interest to become self-sufficient. There should be enough "profits" from interest to provide keep the pool of funds for additional loans full without requiring additional cash to be appropriated (and to cover operating expenses), but it shouldn't be a significant source of revenue for the government. However, all those shiny happy promises about creating jobs, strengthening the economy etc. are accomplished basically due to one simple fact... you're putting significant amounts of money back into the pockets of the middle class. This will increase spending which in turn increases demand for products which spurs hiring and it all feeds into the positive feedback loop of a strong economy.
Anyhow, Senator, I hope that somehow this skeleton of an idea somehow makes it's way to your eyes for a look. I think the benefits to the average middle class family are potentially great and this would force banks into rethinking how they provide mortgages in order to compete. They'd no longer be able to nearly double the cost of a loan for reasons unfathomable with compounding interest pushing monthly payments to levels that often, in times of hardship, result in a filing of bankruptcy and a loss of the home. I'd also like to add that even though I haven't lived in Massachusetts in a couple decades I can't help but still think of you as my Senator, and that makes me damned proud. Thank you.