The overarching goal of SAFE—the Saving America’s Family Equity plan—is to transfer large numbers of existing loans from the current holder of the mortgages—who is faced with a variety of uncertainties and conflicting interests—to new owners who will refinance them on affordable terms. The sale price paid would reflect the current value of those mortgages, significantly less than the face value.
This “haircut” will ensure there is no bailout of the financial institutions and existing investors, many of whom uncritically and irresponsibly created the bubble by lending in the hope that continued house price appreciation would make up for the absence of meaningful credit evaluation. The resulting transfer will help to unfreeze financial markets. Current investors will exchange the mortgage-backed securities they hold whose value is uncertain for the liquidity and reduced market risk of Treasury securities or cash. Our SAFE program also includes complementary policies, such as:
Housing Counseling Resources. Counselors are essential partners in helping homeowners into restructuring programs, but the system must grow to meet the current and future needs.
New Federally Backed and Responsible Loan Products. Given market uncertainty, investors will only fund new SAFE loans if the government insures against catastrophic losses. Credit enhancements for new SAFE loans to owner-occupants would include more flexible Federal Housing Administration-insured loans as well as special programs for Fannie Mae and Freddie Mac.
A Mechanism to Prevent Borrowers from Getting a Windfall. Any loan that is written down to below current fair market value of the home could be accompanied by a “soft” second mortgage that permits the lender to recover an amount up to the difference between loan amount and current value, if the home is subsequently sold for more than the new loan amount. A shared-equity instrument would enable the owner, funder and insurer of the loans to share in home price appreciation up to the original loan balance.
For more information about the Center for American Progress’ policies on the housing crisis, see:
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