Would a reverse ARM be helpful in resolving the subprime mortgage problem?

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The big problem seems to be people defaulting on their mortgage loans, which leads to foreclosure and losses for the banks.
What if the banks offered to take 20% of the mortgage amount and put it in a non-interest accruring loan account, base mortgage payments on the 80% balance at high interest rate, allow the home owner to make optional payments to pay down the 20% to qualify for lower interests rates on the 80% mortgage, would this be helpful in keeping these mortgages viable?
Would this help in avoiding a taxpayer bailout of the financial system?

The big problem seems to be people defaulting on their mortgage loans, which leads to foreclosure and losses for the banks.
What if the banks offered to take 20% of the mortgage amount and put it in a non-interest accruring loan account, base mortgage payments on the 80% balance at high interest rate, allow the home owner to make optional payments to pay down the 20% to qualify for lower interests rates on the 80% mortgage, would this be helpful in keeping these mortgages viable?
Would this help in avoiding a taxpayer bailout of the financial system?

7 Comments
  1. Reply
    Overt Operative
    February 14, 2011 at 12:50 pm

    sounds like a plan

  2. Reply
    pdooma
    February 14, 2011 at 1:46 pm

    I don’t think there are enough people who could even do that. Too many people are too deep in and their houses are losing so much value that no mortgage company will touch them. No point in giving someone more money than the asset backing the money is worth.

  3. Reply
    Holy Cow
    February 14, 2011 at 2:45 pm

    Had regulators and bankers been doing their jobs in the first place, these loans would never have been made.

  4. Reply
    tribeca_belle
    February 14, 2011 at 2:59 pm

    It’s a little late to start thinking of ways to help homeowners because the financial repercussions have already spread throughout the economy. Nevertheless, homeowners should be offered sensible interest rates that would enable them to pay their mortgages and would allow the lenders to make a decent profit.

  5. Reply
    inappropriatus
    February 14, 2011 at 3:08 pm

    I think what you are proposing is basically a principal shifting account, where the banks agree to not accrue interest on a portion of the principal. If this were possible to do I believe that the banks would be offering it, the reason they are not is because they would lose, based on your numbers, 20% of their income from mortgage interest accounts.
    If you saw the Bear Stearns–Countrywide etc failures you would realize that the economy is in such a slippery state that any shifting of income as you propose would put a bank in a precarious position…more bank failures is not a good thing.

    So no I do not think that your plan is a good one.

    What is needed is mandatory resturcturing of the sub prime market, which would reduce incomes, as above, but with “top and bottom” adjustments to allow both the lenders and the buyers to survive, there could be some hope. But the administration has said that they would not endorse such and act, and the congress does not appear to willing to act.

  6. Reply
    paulcondo
    February 14, 2011 at 3:26 pm

    when I bought my first house 30 years ago you should how rough it was to get a loan I had to put 20% down and write a letter saying I was gping to get marry in 2 years

  7. Reply
    namsaev
    February 14, 2011 at 3:42 pm

    To hell with all ARMs. And pass a law that they are illegal.

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