A Solution That Works

Still have questions about how this housing relief plan works? Get answers to frequently asked questions about our plan to stop foreclosures, stabilize property values and help American homeowners.
 

If you have a question about the homeowner rescue plan that you’d like answered, please contact us here.

• How is this plan different from the $700 billion dollar government banking bailout?
• I thought the government bailout bill was already passed? Isn’t it too late now for this plan? Didn’t we miss our chance?
• How much will this plan cost?
• Haven’t the taxpayers already spent enough on bailing out big banks and the mortgage industry?
• How does this housing rescue plan help the average homeowner? Isn’t this just another bailout for the mortgage industry?
• How much would this plan cost each taxpayer?
• If we implemented this plan, how long would it take to work?
• I don’t have a sub-prime mortgage, and I make my payments on time. How does this benefit me?
• Who is behind this plan? Are there any other business leaders, politicians or economists who agree with you?
• Who is Dan Gilbert, and why should I trust what you say? Don’t you have a personal and business interest in seeing this plan implemented?
• Why hasn’t someone already thought of this? Why are we just hearing about this now? If it’s such a good idea, why haven’t we already done it?
• Aren’t mortgage companies responsible for this crisis in the first place? If the mortgage industry had acted with more restraint in the past, we wouldn’t be facing this issue in the first place, right?
   

A: The Emergency Economic Stabilization Act of 2008 (informally known as the “bailout bill” or “Troubled Asset Recovery Program”) passed on October 3, 2008, was primarily a banking bill, and not a homeowner relief bill. Its intent was to shore up confidence and stability in the banking system and credit markets. While the Feds will buy whole loans and securities from banks in order to “get rid of their bad debt” (and in theory, keep them in business), the legislation is unlikely to do anything to stop the free-fall in property values, foreclosures and out-of-control mortgage payments. This plan attacks the foreclosure issue head on, giving relief to homeowners facing the double whammy of rising mortgage payments and falling property values. It also reduces the risks to institutions that invest and fund these loans, restoring stability and confidence to housing market. Top

Q: I thought the government bailout bill was already passed? Isn’t it too late now for this plan? Didn’t we miss our chance? 

A: While we believe that this housing market rescue plan would have been more effective at stabilizing the economy than the recently passed bailout bill, the fact is that Congress and the President were under intense pressure to come up with some type of plan to buttress up financial markets. Whether or not you agreed with it, something had to be done. And this was their solution. The problem is that the recently passed legislation does not solve the foreclosure problem. Until the tide of foreclosures is stemmed, we’ll continue to see plummeting home values and a deep lack of confidence among homeowners, investors in mortgage securities, and the broader markets globally.

Within hours of the bailout bill being passed, intra-day trading on the Dow was down 457 points — one of the biggest percentage drops in the final three hours of trading in the history of the stock exchange. Even now, markets continue to be shaky. Investors are still clearly skittish even with the promise of $700 billion in bailouts, and we think the looming specter of more foreclosures is at the root of this.

So while we think the bailout bill was an attempt at trying to do something, we don’t necessarily believe it will be enough to fix the real problem: foreclosures.

“A Solution That Works” attacks the foreclosure issue head on and solves it, we believe. So we view it as a plan we need to implement in addition to the bailout — but at much less cost to the taxpayer, and with greater benefits to homeowners. Top

Q: How much will this plan cost?

A: Based on our calculations (which you can review in the full plan), we estimate that our housing market rescue plan will cost a total of $50 billion over five years, with the first three years weighted more heavily. There would be some reduction in tax revenue from the double tax deduction write-off we propose in this plan, but the cost of this incentive would be much less than the cost of the massive, and continuing write-off we expect in the coming months if the housing market isn’t stabilized quickly.  Top

Q. Haven’t the taxpayers already spent enough on bailing out big banks and the mortgage industry?

A: We believe that this is one of the first, viable plans that actually provides immediate relief to the homeowners who are most at risk for foreclosure. It also rewards average Americans who are in standard conforming loans and are making their payments, but are rapidly losing equity in their homes as foreclosures in their neighborhoods increase. By stopping the flood of home foreclosures, we can stabilize property values, which is good for all Americans. While banks and mortgage securities investors benefit as well, at its core, this plan will help Americans stay in their homes and stop the “death spiral” in its tracks. Top

Q: How does this housing rescue plan help the average homeowner? Isn’t this just another bailout for the mortgage industry?

A: This is not a bank or mortgage company bailout plan - it’s a homeowner bailout plan. At the root of the foreclosure problem are average homeowners whose properties have depreciated to levels where they owe more than their home is worth, whose payments have skyrocketed as their mortgages adjust, or - in the most dangerous scenarios - have had both occur simultaneously. When values drop below what’s owed and mortgage payments go up hundreds of dollars, for many people, the only rational thing to do is turn in the keys and walk away.

By resetting the most risky mortgages into a safe, stable, 30-year-fixed amortizing loans with a low interest rate capped at 6.375% for 30 years, you remove the incentive (and indeed, need) for a person to “walk away” from their home. And you also provide a method for the homeowner to “dig out” with an affordable payment. The first five years are subsidized at a lower rate to give the homeowner a head start on getting above water, and in years 6-30, the homeowner is locked into a stable, non-subsidized rate of 6.375% that would NOT GO UP.

The result would be fixed payments with zero chance of payments or rates going up, no more negative equity, a decreasing principal balance with each monthly payment, and finally, a stabilized housing market.

Do mortgage companies, banks and mortgage securities investors benefit?

Sure. But that’s a good thing.

As foreclosures subside and property values stabilize, the risk of investing in or holding these loans is dramatically reduced. This improves the balance sheets of banks and investors, removes the threat of bad debt, and restores confidence in financial and credit markets. And it would do it at 1/14th the cost - or 7% - of the recent $700 billion dollar federal bailout.
In other words, everyone wins. Top

Q: How much would this plan cost each taxpayer?

A: Based on our math, we estimate that it would cost each taxpayer approximately $362 spread over five years, or about $72 additional dollars in taxes a year -about the cost of two tanks of gas each year. Top

Q: If we implemented this plan, how long would it take to work?

A: While it’s impossible to predict how markets will react, we believe that if implemented correctly and quickly, the plan would cause a rapid stabilization of the housing market. Within a few months, we would expect to see stabilization of property values (although not necessarily appreciation - that will take longer.) However, the key point is that by implementing this plan, you can quickly address all four drivers of the housing market death spiral: foreclosures, ballooning payments, falling property values, and risk to institutions that hold or invest in mortgage-backed securities. Only by addressing all four issues simultaneously can the market be stabilized. Top

Q: I don’t have a sub-prime mortgage, and I make my payments on time. How does this benefit me?

A: Even if you are in a standard 30-year-fixed fully amortizing loan and are able to make your payments on time, in nearly all markets, you’ll have experienced a drop in neighborhood property values. With each additional foreclosure in your neighborhood, other homes in the vicinity take a hit. This encourages additional foreclosures, and the cycle continues. If left unchecked, it’s possible that you could lose so much equity in your home due to localized values falling, that even you owe more on your house than it’s worth.

This plan would stem the tide of foreclosures and stabilize local property values, reducing the risk of negative equity - even to those people who are able to afford their payments each month. And because there is no principal forgiveness under our plan, this doesn’t create the fairness issues that come up with some of the other plans that have been floated out there. We really believe it’s the fairest way to solve this problem quickly. Top

Q: Who is behind this plan? Are there any other business leaders, politicians or economists who agree with you?

A: This plan was developed with input from economists and business leaders in the real estate, housing, banking and mortgage industries. A number of legislators and attorneys have also vetted the plan.

The core of the plan, however, really revolves around what we hear from individual homeowners every day, as we try to help them in a market that is often stacked against them. Every day at Quicken Loans, we talk with homeowners who have great credit and good income, but are in ballooning mortgage payments with huge pre-payment penalties (and often negative equity) that keep them from being able to refinance into a more secure and predictable rate and payment. It’s not only frustrating and terrifying for the homeowner, but it’s also frustrating for us because, in many cases, it makes helping them almost impossible. Top

Q: Who is Dan Gilbert, and why should I trust what you say? Don’t you have a personal and business interest in seeing this plan implemented?

A: I think I have a unique perspective on the housing, real-estate and mortgage industry, having provided home loans to Americans for over two decades as the owner of Rock Financial and Quicken Loans. We’ve been through market down-turns in the past (although clearly not this serious) and survived. My goal here wasn’t to make this discussion about me, but about possible solutions for the current financial crisis. My plan is just one of several, but I do think it’s based on common sense, input from a lot of other business-owners, homeowners, and our own team members. And while no-one can predict the future, I do think this plan could work.

The truth is, we all have a vested interest in seeing the housing market improve. The current state of the housing industry isn’t good for anyone: it’s not good for individual homeowners, it’s not good for businesses and banks, and it’s not good for the stock market.

Would this plan benefit mortgage companies like Quicken Loans? Absolutely. But this plan is also very good for homeowners. In fact, if it didn’t help individual homeowners first and foremost, it wouldn’t be successful at turning the tide of foreclosures. When a homeowner has negative equity in a home , and a monthly payment that just keeps going up, you can’t really blame them for walking away. In many ways, it’s a very rational solution. And that’s the problem: Until we can provide some kind of relief to these people, the problem is only going to grow more serious. And the longer we let the spiral continue, the harder it will be for anyone to dig themselves out. That’s what we should really be worried about.

In terms of why you should trust me, you don’t have to. This isn’t about me, or Quicken Loans, or even my 25 years of experience in the mortgage business. This is about an idea. There’s no ideology attached to it, and no ulterior motive aside from seeing the housing market stabilized.

Would it benefit me and the business we’ve built? Yes. But it would also benefit nearly every American as well. It’s a possible solution to a seemingly intractable problem, and one that I think just might work.

That’s why I’ve posted it here for everyone to see and read for themselves. We’ve done the math and believe this will work. We show you how we arrived at these numbers. Everything is transparent and out there for you to analyze and decide for yourself. If we don’t stop this death spiral of foreclosures, increasing monthly payments and declining property values, we’re going to experience much broader and deeper effects across the U.S. and global economy. Every citizen, business leader and politician has an interest in preventing that from happening. If you think there are flaws in this idea, then let’s hear about them. If this is going to work, it will take more than just me and this website. It will take eyeballs and input and work. But I do believe it’s possible. Top

Q: Why hasn’t someone already thought of this? Why are we just hearing about this now? If it’s such a good idea, why haven’t we already done it?

A: Any real solution to this perfect storm of foreclosures, depreciating property values and increasing payments has to benefit four main groups:

1. Homeowners who are on the verge of foreclosure.
2. Homeowners who face the prospect of foreclosure in the future if their monthly payments can’t be brought down.
3. Homeowners who can pay their mortgage and still have equity but are nervous about falling property values.
4. The financial institutions that fund and invest in mortgage securities.

If your solution doesn’t benefit all four of these groups, without unduly punishing or rewarding any one of them, it won’t work.

That’s why taxpayers are upset about the bailout legislation. While stabilizing banks may indirectly benefit the average citizen, it doesn’t directly address their own day-to-day needs - or fears.

The result is that we have lopsided solutions without clear benefits to each of these four critical constituencies. Most of the current solutions presented to date don’t attack all four of the issues driving the housing and credit crunch: decreasing property values, increasing mortgage payments for people in certain loans, increased rates of foreclosure, and investor jitters (compounded by bad debt that is still coming home to roost).

Many of the solutions so far have tried to focus on solving one of these problems, in hopes that in the process, it will solve the “many.” But the housing crisis is a multi-headed beast - to slay it, you have to go after all of the heads at once. This is one time when the rising tide of one piece of legislation won’t raise all ships.

Is this the only solution?

No way.

We’re sure there are others out there. And it’s likely that somewhere there may be a better solution.

But so far, we haven’t seen it. Politics, especially in an election season, also have a way of keeping simple solutions from bubbling up. But we believe that by putting this possible solution out there, with all of the details in plain view, we can light a fire and collectively work to solve our current crisis once and for all. And today, with the power of the Internet and individual word-of-mouth, we can create a groundswell of support for a common-sense solution to a seemingly impossible-to-solve problem. Top

Q: Aren’t mortgage companies responsible for this crisis in the first place? If the mortgage industry had acted with more restraint in the past, we wouldn’t be facing this issue in the first place, right?

A: The current economic situation is complicated. And while banks, mortgage companies and investors all share responsibility for the problems we’re facing, there are other larger economic issues that have compounded the crisis, including stagnant wages, rising gas prices and waning consumer confidence.

Many of the problems in the housing market were caused by excessive real estate speculation, home-flipping, and granting sub-prime loans to individuals with very low credit. Like the dot-com stock boom of the late 90s, people psychologically expected property values to continue to go up, since they had been increasing at an unprecedented rate for well over a decade. As long as property values were increasing, and equity was growing, the market could support more exotic loans like Option ARMs and Interest-Only loans. Indeed, in some markets (like California), these types of loans were the only way a person could ever hope to own a home.

There is no doubt that if all Americans had been in conforming, 30-year-fixed, fully amortizing loans, the current market spiral would have been less severe. But there is no way of knowing whether that alone would have been enough to prevent falling property values and a credit crunch. In the middle of this crisis, it’s easy to forget that relaxing some lending standards opened up the dream of home ownership to plenty of people who might not have qualified in the past. And the vast majority of those people are still living in their homes, making their payments each month and doing alright.

The fact is, we have to deal with the situation at hand, and try to move forward to minimize (and reverse) the death spiral we are currently in. As the Chairman and owner of the largest online mortgage company in the U.S., I’m proud of the work we’ve done over the past 25 years to put people in homes and help them achieve a piece of the American dream. But I also acknowledge that our industry probably made some mistakes and, like the rest of America and Wall Street, may have got caught up in a market that seemed to have no ceiling when it came to increasing property values. And for that, we should be willing to bear our share of the pain of correcting this market.

At Quicken Loans, the majority of our business was writing standard vanilla conforming loans. We never did any significant sub-prime business, and although we did offer a version of an Option-ARM for a short time, and still offer a conforming fixed rate mortgage with an interest-only option, we never placed pre-payment penalties on these mortgages and kept our adjustment caps low. They were never our bread and butter and contributed very little to our business. This is probably one of the reasons we are one of the last remaining pure-play direct mortgage lenders still in business today.

The plan I’ve proposed doesn’t give the mortgage lenders, banks and institutions a free meal ticket or taxpayer-subsidized bailout. We’ll have to bear our portion of the pain as well, and take our losses and hits. But these losses are nothing compared with the consequences of continued inaction. Unless we do these things, the hope of home ownership will only become a luxury for the wealthy. Top