Mortgage modification legislation is currently moving through Congress; the bill allows bankruptcy judges to reduce the principal as well as the interest rate on an outstanding loan.
Consider the case of a homeowner who, after their home purchase, experienced an initial strong upturn in the value of their house. Flush with equity and assured by experts that the value of their home would go up forever, they took out a home equity loan and spent the proceeds on clothing, jewelry, vacations and a new SUV. Now that housing values have gone south, they file for bankruptcy; and a judge reduces the principal on their home loan. What has been consumed already, via the equity loan, the homeowner keeps.
The rest of us pay the bill. Would you want to be a lender when these are the rules? To compensate for increased risk to lenders, interest rates of all kinds will go up; indeed the market for some types of loans may dry up completely. No matter, Congress will pass another fix for that.
Most importantly, a prime principle that built America—namely, that we honor the contracts we sign—will turned into a national game of how we can avoid honoring our contracts. As more people play that game, our principles will erode and the economic depression will deepen; we will all pay the price.
Since Congress and the President seem determined to do everything in their power to turn us into a third world country, let’s learn from a country like Bangladesh.
Dr. Muhammad Yunus is a Nobel laureate from Bangladesh. Dr. Yunus’s great genius was to figure out a system that would allow for poor but entrepreneurial minded Bangladeshis to borrow money and start a business. These loans are not collateralized; yet, over 98% of the time, these loans are paid back in full. How? Each applicant has to form a team with four other applicants, and they each have to cosign for each other’s debt. Given that, you can be sure that business plans are carefully scrutinized by the cosigners.
If Congress passes the proposed mortgage modification measure, I suggest we borrow a page from Dr. Yunus. I propose there be no reduction in principal until a household budget is submitted to and approved by four cosigners. That’s right, the cosigners would be on the hook if the homeowner defaulted again. Cosigners might consider imposing these terms to minimize the chances of a default:
- No loan modifications granted for homes which are above 1500 sq. ft. If your home is larger, you need to downsize first.
- No occupant of the home can own or lease a car valued above $10,000.
- No occupant can own flat-screen televisions or subscribe to cable television.
- No occupant can take a vacation away from their home.
- No one can eat out.
- No purchases of processed food would be permitted. This reduces the family’s food budget. It also lessens the chance of an illness which could interfere with paying back the loan.
- Non-food purchases above $100 would have to be approved by the cosigners.
Pretty draconian? Very few would apply? That’s the idea. And yes, I would apply the same terms to everyone in Congress who votes for the mortgage modification bill. After all, they too are spending other people’s money and should be bound by the same terms.