As many of you know, I work for Quicken Loans, one of the top 10 home mortgage lenders in the United States, the #1 online lender of home mortgages in the US, and Fortune Magazine’s #2 best place to work in the US (Google is #1).

Many of you have asked for my opinion about the mortgage crisis, what got us here, and what can be done.  Today, I’ll share a drastically simplified version of the comprehensive solution, called “A Solution That Works” that was put forward last week by Dan Gilbert, Chairman of Quicken Loans.

You really don’t need to be a rocket scientist to understand the housing crisis, or the solution to it, no matter what anyone tells you.  It will take the right leadership to get us out of the challenging situation we are in.  And, just like in almost every leadership challenge, you can’t let how hard you think the solution is prevent you from doing it.

On to the plan…

The Situation Right NOW

• Homeowners today are “striking out” by having a declining home value (strike 1), an unpredictable and growing monthly mortgage payment (strike 2), a growing mortgage balance that they owe the bank (strike 3). Often when this strike out happens, a Homeowner cannot make their payments, or chooses not to, resulting in foreclosure.
• Unfortunately, the $700 billion financial rescue plan passed by Congress last week does little if anything to address these Homeowner issues (stopping foreclosures, declining home values, and dramatic increases in mortgage payments).  These issues are the fundamental reason why the “credit markets” you hear about on the nightly news are in crisis.
• The goal of “A Solution That Works” is to help each American Homeowner stay in their home, prevent their home’s value from declining, change their bad mortgage to a good mortgage, and prevent foreclosure.

A Solution That Works, a Simplified Version of the Plan

1. The Homeowner would work through a Lender to have their bad mortgage changed to a new, 30-year fixed rate mortgage.
2. This new mortgage would have an interest rate of 6.375% fixed for the life of the loan, but would also have a low interest rate (starting at 4.875%) for the first 5 years, to give the homeowner some relief and allow them to “dig out” of their mortgage situation.
3. If the Homeowner owes more than the original loan amount (due to not paying enough interest or any principal, like if they are in an “Option ARM”), the Lender will essentially cover the difference.

A Solution That Works, an Example

The Smith family purchased a home in 2006 and got an adjustable rate mortgage (ARM).  In October, their interest rate adjusted from 6.5% to 9%.  As you can see below, their payment jumped as well:

With A Solution That Works, the Smith’s family’s mortgage payment is reduced to $1,064 initially, and gradually increases over 5 years to approx. $1,250 and WILL NOT change for the remaining 25 years of the loan.

My Thoughts

Personally, I believe that a combination of greed (from Homeowners, Banks, and Financial Institutions), irrational expectations about home values, and a lack of Federal oversight lead to the housing crisis we are in right now.

To get out of this, we have to treat the cause of the disease, not merely it’s symptoms.  I believe “A Solution That Works” would do that.  Here’s why:

1. This plan puts the Homeowner first, helping them to get out of the bad mortgage they are in.  The result is reduced foreclosures and more stable property values.
2. This plan can quickly create a win-win for Homeowners (who get a new, better loan) and Lenders (who get support from the government).
3. This plan is an efficient and practical use of Federal dollars, especially since a lack of government oversight was a major contributor to the situation we are in now.  In this plan, the Federal government would pay the difference between the 4.875% rate and the 6.375% rate for those first five years.  Also, this plan would allow lenders to write off 2x the interest the Homeowner did not pay that was previously added to their loan amount.
4. The cost of this plan would be $50 billion, roughly 1/14 the cost of the $700 billion financial rescue plan passed by Congress last week.  And, it also eliminates the need for a new bureaucracy outlined in the bailout bill to buy bad mortgages.
5. Finally, this plan also gives the investor in these loans higher odds of recovering their investment (versus dealing with foreclosure) by immediately stabilizing the housing market.

Now, before you think: “isn’t Quicken Loans one of the reasons we are in this situation?” Please consider that although Quicken Loans did offer some versions of these loans, we never made these products our “bread and butter” and we never did any significant subprime mortgage business.  Our overall business has always been in standard, “conforming” loans.  Also, please feel free to read Quicken Loans Reviews to learn about our excellent customer service.

I encourage everyone to read the plan for yourself and comment here to let Dot Connector readers know what you think!

More information

• A Solution The Works Website
• A Solution That Works: Frequently Asked Questions
• Watch Dan Gilbert discuss his plan on CNBC
• Detroit Free Press coverage of the plan

What you can do

• Find your Congressional Representative
• Find your U.S. Senator
• Contact the President and White House
• Contact Henry Paulson, The US Secretary of the Treasury.
• Contact Your State Governor
• Contact Your State Representative
• Contact Presidential Candidate Barack Obama
• Contact Presidential Candidate John McCain

UPDATE: A great overview of the current financial situation, in extremely clear terms:

[youtube=http://www.youtube.com/watch?v=h4Ns4ltUvfw]

See also:

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