In 2007, after years of unsustainable growth, the U.S. housing market began to collapse. A wave of foreclosures accelerated the decline and a brief flirtation with the American dream ended for many hard-working families.
The new year will, I hope, bring a new resolve to solve this crisis and provide relief for thousands of Nevada homeowners. Our current mortgage system, like our federal income tax system, seems designed to reward failure and punish success, and indeed the entire loan modification process is backward.
First, buyers must be in default to qualify, which means no relief is available unless the homeowner stops making payments and destroys his credit. Second, while banks reduce the initial mortgage payments, they typically add this amount and more to the back end of the loan, ultimately increasing the cost for the homeowner. Third, as with most government programs, there are people who abuse the process for personal gain -- there simply isn't sufficient fraud prevention in place.
Nevada's housing crisis is far from being solved. Indeed, it's getting worse. In the first half of 2010, one out of every 17 homeowners in Nevada filed for foreclosure. Values of homes have plummeted and in some areas more than 70 percent of homeowners are upside-down, meaning they owe more than their homes are worth.
There is a solution to our housing crisis, but it isn't more government programs. The answer is in the adoption of streamline refinancing with Fannie Mae and Freddie Mac loans -- as is currently available with VA and FHA loans. Streamline refinancing allows homeowners to refinance their mortgages at the current lower interest rate without an appraisal. The only requirements are that the homeowner must be current on their mortgage and be able to show a source of income to pay the mortgage.
Congress attempted to pass a remedy but did not go far enough. The bill they passed allowed homeowners with 125 percent loan-to-value to be refinanced. Why the 125 percent cap? If we remove it, all homeowners current on their mortgage can take advantage of the incredibly low rates, currently around 4.25 percent. A homeowner with a $250,000 30-year mortgage at 7.5 percent interest pays $1,748 per month. If that same homeowner refinances at the current rate, his monthly payment drops to $1,230 per month. This savings could be the difference for thousands of people struggling to stay in their homes. For tens of thousands of others it would provide $518 per month in discretionary money -- a real stimulus to our economy. Finally, we the people would benefit from the low interest rates, not just the banks.
Without creating any more government agencies or spending any more taxpayer money, streamline refinancing will save the housing market, provide a real stimulus for our economy, and create an abundance of job opportunities -- not to mention significantly increasing the demand for office space in Nevada, which is currently at all-time lows. And it will do so, without requiring banks to reduce the principle owed on the loans and thus a loss on their assets.
Our government is standing in the way or refusing to enact common-sense reform that could make the difference for millions of Americans, including many who call Nevada home.
It's time we the people demanded practical, market-oriented solutions, and what better place to start than with helping our neighbors keep their homes?
Danny Tarkanian is president and founder of the Tarkanian Basketball Academy and a former U.S. Senate candidate.