After trying to help Americans pay their first mortgages, the Obama administration is now going to tackle second mortgages. This latest effort to address the housing crisis offers incentives to mortgage lenders to lower interest rates of so called "piggyback" loans. According to a recent Associated Press article, nearly half of all trouble mortgages have a second mortgage attached to them that enabled the borrowers to make--or even avoid--a down payment. The main problem with these loans, beyond the fact that they were often given to borrowers with poor credit, is that different companies often hold the two mortgages. When borrowers try to get their primary mortgage modified, they need permission from the company holding the second mortgage. According the Treasury Department, this new program will be funded by $50 billion of the bailout money to give a series of payments to mortgage companies. Mortgage companies would get $500 upfront for each loan modified at a lower interest rate, plus $250 a year for three years as long as the loan is in good standing. "Similarly, borrowers would get up to $1,000 over five years applied to the principal balance of their primary mortgage, and the government would pick up part of investors' costs as well. Lenders would also be given the ability to remove second mortgages entirely in exchange for larger government payouts," said the AP report. This latest effort may go the way of the government's "Hope for Homeowners" program, which has failed due to banks' lack of involvement. This program was touted by President Obama in a White House photo op as a solution to the housing crisis by helping 400,000 homeowners get better rates on troubled mortgages, thus stemming the flow of foreclosures across the country. So far banks have been reluctant to absorb the losses and according to the AP one loan has completed the program so far. Despite the catchy titles, the government's programs may not be the answer to stabilizing the housing market, but economist A. Gary Shilling and real estate developer Richard Lefrak think they have the answer. Financial columnist Scott Burns recently wrote about their idea that does away with all of these complicated programs and simply eliminates the oversupply of houses across the country. "How can this be done?" writes Burns. "Simple: Open our borders to immigrants who can buy a home in the USA. Let a million immigrants a year do this for two years, and the entire oversupply of homes and condos will be absorbed. Supply will no longer dwarf demand. Prices will stabilize. The most important asset owned by the vast majority of Americans will once again be a source of pride and security." Burns argues that home value is the greatest single asset of most Americans, worth more than any money tied into financial markets. By stabilizing the housing market, the entire economy could be stabilized. Shilling estimates that over 6 million homes were built during the housing boom in excess of actual demand. The move-to-America-buy-a-home-become a citizen plan doesn't need to be funded by the bailout money and doesn't need a complicated formula of payments to banks. Of course, it won't be easy to convince Congress to go along with this one.
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