2008 Fiscal Crisis Remedy:
Financial Values Shift Equity toward Credit Appreciation
Now if banks were smart they would have realized this a long time ago. Instead they go along with the equity game, which is always a smaller pie, when it comes to the loans they dish out. Who in their right mind can actually believe that? I want to buy a house for 285,000 dollars and come in with a 50,000 down payment to have the bank fork over 235,000 dollars to a seller, in which the bank is betting I make good on over a protracted period of time. The bank essentially has more equity in the house than the buyer, who only put in 50,000 dollars. Yet the banks are caught holding the bag, because of an appraisal process that is always hedging upward with the idea of gaining profits.
What determines a houses value? In a community with a healthy growth rate, with more and more people taking up residence (more buyers in the market place), the demand for housing usually increases. This in turn increases the market value for your home. Conversely, with a sluggish economy, slow growth, and no demand or few potential buyers in the market, your residential property's value will probably flatten or decline.
They say that Property Appraisers create none of these market situations; but individuals in the community create value by their own transactions in the market place. The Property Appraiser is, however, mandated by State Law with the legal responsibility to discover these market changes and to appraise all affected properties accordingly. Of course Property Appraisers are going to do what the community wants and most communities want to see high appraisals in order to gain unsubstantiated profits from inflated appraisals.
Home Equity is the amount of ownership that has been built up in a property. Typically, residential property is bought through a mortgage, which is then paid off after a number of years. After the mortgage has been fully repaid, the property then belongs to the mortgager, who is the buyer. However, the buyer simply builds up "equity" in the home. This equity is equal to the current market value of the home minus the outstanding mortgage balance. This is what a home equity loan borrows against. Although that equity cannot be sold, banks will lend money against it.
So why do banks always blame people with bad or poor credit risk? You know if the economy was so great those people would make their payments on time. In fact since there are so many people called bad credit risks tells me something is fundamentally wrong with the way the Banks have been doing things for a very long time.
Let' s not blame the people with credit risks, better to show how the bank doesn't live up to reality by insuring against such risks, and having banking services that eliminate those risks and actually helps people to protect their credit, and promotes their credit worthiness to build credit appreciation. Banks do none of this, and so in their failings they want to blame the people? It is such an outlandish economic blame tactic. Come on Big Bankers you can do a better job than that.
The 2 Loan Mortgage Statue Stability Act:
The way to fix the problem especially for home mortgages is to forget the one loan that is always given to home buyers. What is needed is to give two mortgages to the home owners. Just like we need two arms, two legs, two ears, and really two brain hemispheres to think in this world; we need two loans. One loan is for buying the house. The other loan is used to make payments on both loans. This way no one ever faces default. Sooner or later the money runs out, but it is enough time to prove a worthy credit history, then another loan is taken to replace it. This can go on indefinitely because banks will always be in the loan business. Home values should not be based on equity accumulation. It needs to be based on Credit Worthiness or Credit Appreciation.
Banks will not have to worry about losses because investors will look to bank profits from a dual interest accumulation from a 2 Loan Mortgage Policy. And what will really drive the economy is the ability to write off both loan interest rates from your annual income taxes. Now I don’t know about your thinking, but that is a sizable tax benefit, that can be permanent and real, never mind the mindless GW Bush tax relief rumblings.
Really the banks and politicians create this crisis when they don't promote home ownership secure from work place economic factors.People end up buying a house hoping to build equity so they can have the security to use the money for something else, such as buying another new home, or using it as a basis to have better credit to pay for other things, be it education, medical bills, wedding, a new car, since the work place economic factors always seem to fail due to politicians egregious errors. People use their homes as a buffer against failed economic policies. And since there is no security plan for homes from the work place economic factors, people default on their loans.
People have no other choice but to expect to have rising appraisals because many have low equity accumulation and hope when they buy they can inflate the house value under a false assumption the market will support it, and ultimately end up losing. People always expect a profit from Real Estate, instead of thinking homes are something we intend to keep forever.