Mortgage Interest Rate Should Be Raised, NOT LOWERED, To Balance Mortgage Payment Reduction

As a commercial broker, I save the largest restaurant in Palo Alto California by lowering the monthly payment of one of its loans from $14,000 to $4,000 and allowing the bank to raise the interest rate by 1%, which is negligible in comparison to the 40% expected rate of return on investment for small businesses (I hold the US patent "Quantitative Supply And Demand Model Based On Infinite Spreadsheet" Pat. No. 6,078,901, which can calculate the expected rate of return on investment. For single family home, the rate of return is historically about 10%). This proposed loan adjustment is praised by bank regulators, and the entire senior staff of the bank hold a small banquet in my honor for helping both the bank (Union Bank in Oakland) and the restaurant.

Any government policy should be fair. There is no reason to have the policy biased toward the defaulting homeowner. And there is no reason for the tax payer to bear the burden, except as a last resort. If the homeowner cannot afford a large monthly payment, the government or the bank should reduce the payment to a level that the homeowner can afford, even to an amount which is less than the interest only payment (the principal will increase). And to balance the reduction in payment, the mortgage interest rate should be raised proportionally. Conceptually, a homeowner, who cannot pay the monthly payment now, should pay the payment with the homeowner future income in the form of a gradual equity reduction.

Also, there should be a heavy fine for "littering" the housing market with foreclosed property by the homeowner, just as there is a heavy fine for a driver littering on the highway. There should be a justifiable foreclosure fee, if the homeowner insists on going through with the foreclosure. The homeowner should bear the largest share of the responsibility for the damage brought about by the foreclosure.

As a licensed practicing real estate broker for over 30 years, one of the worst things for a home is to have it unoccupied or unmanaged for an excessive period of time. The deterioration as the result of the abandonment is not only damaging to the owner and the bank, but also to the entire community. In a word, the home must be occupied to keep its value and the value of its neighborhood. Thank you for your attention. Hugh Ching, Post-Science Institute

Subject: How to stop price drop and to reduce foreclosures to boost confidence

Post-Science Institute would like to make a suggestion on how to stop price drop and to reduce foreclosures to boost confidence.

The basic problem of the current credit crisis is the still decreasing house price. There is an over-supply of houses in the supply and demand VALUATION model. The supply is continue to expand due to foreclosures, and the demand, to fall due to price decrease. Banks are reluctant to lend because loans will decrease in value due to the decrease in house prices. The decreasing price will cause more foreclosures, which in turn cause more price decrease, resulting in a vicious cycle of decreasing price and increasing foreclosures.

THE SHORT-TERM SOLUTION TO THE CREDIT CRISIS IS TO SLOW DOWN OR STOP THE FORECLOSURES.

The current financial crisis is brought about originally by the Subprime Woe. We need to nip the growth of the instability at its root by reducing foreclosures through rationally restructuring the mortgage.

Homeowners should be encouraged to keep their homes by allowing them to lower their mortgage payments to any level, which the homeowner can afford, even with negative amortization, and having a high penalty for foreclosures. To be fair to the bank and to make this a permanent solution, the lowering of the mortgage payment should be accompanied by a justifiable increase in the mortgage interest rate.

The decrease in payment benefits the homeowner, and the increase in interest rate increases the value of the mortgage. The bank would be willing to participate in the renegotiating of the loan with the endorsement of the bank regulator because the bank can avoid the cumbersome and damaging process of foreclosure. Real estate brokers at Post-Science Institute have some actual experience in doing this type of renegotiating with win-win results.

The basic rationale is to have pre-foreclosure homeowners pay with their future in the form of equity reduction, instead of with the future of taxpayers in the form of the bailout plan. The value decrease in the crisis is so big that it should be spread out among all the pre-foreclosure homeowners.

The fee for foreclosure is a "littering" fine. One important factor in preserving the value of a house and its market is to have it occupied. Again, it is the pre-foreclosure homeowners who cause the problem of the Subprime Woe, and, therefore, should shoulder the main responsibility. With the fee, the bank will be more willing to lend.

The renegotiating of the loans should be done by banks. The Federal Reserve Board should be in the position to make this recommendation to banks.

No, no, no. You cannot offer a review of every mortgage in the country as an emergency measure. It will take too long. The problem is caused by massive over-complexity, and needs dramatic simplification.

Identify the period of problematic mortgages (maybe 2003-7) and legislate a fixed rate (of, say, 8%). Adjustments can come later, or the measure can be rescinded entirely.

This will keep many homeowners from having to sell or abandon their houses. Some of them will be speculators, but this is a rescue of the economy, not an exercise in social justice. Slowing the flood of properties onto the market will slow the decline in housing values.

Meanwhile, the decrease of income into the various, complicated mortgage-backed securities will allow investors to better estimate the relative risk of each package. The greater the marginal decline of income when the cap goes in, the greater is the contained in that bundle.

Do not waste time trying to untangle the Grodian Knots of nationwide mortgage practices and international securities packaging. Fairness and future profitability can wait. The idea is to shake out the uncertainty and convert it to calculable risk.