The Sixty Year Mortgage Solution!

Please go through this interesting proposed solution to the current global economic crisis!


This solution requires very little regulatory intervention and involves absolutely no cost to the tax payer. Yet it will ensure a rapid recovery of mortgage markets, solve the liquidity crisis and avoid a global recession.


Hopefully the product described here will actually enter the market and solve the current crisis.

Also, please post this on your very interesting blog if possible.


There are four policy objectives with respect to the U.S. mortgage crisis:
1) Ordinary people living in their own home need to be empowered to stay in their home without having to default their mortgage payment and have the bank foreclose on them.
2) The housing market needs to receive a stimulus to arrest the downward trend in home prices and avert further decline in economic growth.
3) Mortgage bankers who have either already booked losses or are likely to book more losses need to be recapitalized so that liquidity in the financial system can be ensured.
4) All of the above objectives need to be met without much of an impact on the U.S. taxpayer.


All of the above objectives can be easily met with the introduction of a new commerical financial product, largely within the bounds of the existing regulatory system; but with a couple of small innovations to the current structure of a typical mortgage product.

The new mortgage product required to solve the problem is a simple mortgage loan from any private mortgage banker or other relevant private financial institution.

Though the mortgage loan will be like any other existing mortgage loan product, there will be two modifications to the product:

1) Both the mortgage banker and the borrower will have the right to foreclose the mortgage with due notice. (While I believe this is currently the case from a legal perspective it is very rare for the mortgage banker to actually exercise their right to foreclose unless there is a default by the borrower. The new product will specifically stipulate that the mortgage banker can foreclose the loan at their option with due notice, irrespective of the borrower's payment history)

2) In case the borrower should choose to foreclose their loan, or transfer it to another party, 20% of the proceeds of the sale will accrue to the mortgage banker and only 80% of the proceeds of the sale will be received by the borrower. The same would apply in case the mortgage banker should choose to foreclose from their side.

3) The term of the mortgage loan will be 60 years instead of 30 years.
a) In the event the borrower is deceased prior to the expiry of 60 years, the home will revert to the ownership of the mortgage banker.
b) The only exception to b) above would be that the borrower will have the right to bequeath the home, provided the person receiving the home continues to make the mortgage payments as usual.
c) The borrower will not be compelled by the mortgage banker to take out life & disability insurance to the extent of the mortgage principal and assign it to the bank only as a result of this increased term. The current practice on this will be followed.

4) One important change in the product will be that the mortgage banker will have norms enabling them to lend out the higher of the following two amounts:
a) The current market value of the home (as determined by a valuation, as happends right now)
b) The pay off amount on an existing mortgage loan on the home.


I request you to carefully evaluate the impact that the introduction of this new product or a similar product will have on the U.S. mortgage market and it's beneficiary impact on the current global financial situation.

Expected Impact:

Consider a typical problem right now:

The borrower has an outstanding pay off amount of say $300,000/= on their mortgage. They are unable to afford the monthly mortgage payment and they have less equity in their home than the outstanding pay off amount. The market value of the home is only $220,000/=.

A new lender might be willing to re-finance but the existing banker has to agree to book a loss for this to happen.

In either case, the borrower is not in a good situation to afford the payment.

A new lender can now come in and offer a Sixty Years' mortgage product to this borrower. The lender is very motivated to do this because the lender will be able to
1) Charge a high interest for this product(say around 20% ... 20% is becoming a favorite number here for me :-) )

2) Benefit from a future sale of the home at a higher price. It's important to remember that according to the terms proposed here the lender has a 20% equity stake in the home.

For the borrower the benefit is that they will be able to stay in their home while making a much reduced monthly mortgage payment. In the longer term appreciation in the price of land will ensure that they will more than make up any losses from having to pay 20% of their home equity to the bank.

For the existing lender, there is absolutely no problem because they will realize the pay off amount from the new mortgage in case the market value is lower than the outstanding loan.

Questions and Answers:
1) If the mortgage term is extended to 60 years, will everybody want to move to this structure?
The answer is no, because taking this loan means that the borrower loses 20% of the value of the home to the mortgage banker.
Only somebody who is very serious about staying in their own home for a long term, and who is also currently distressed, will avail of this loan.

2) How long will the 60 year mortgage actually carry on?
Probably within a period of less than 2 years from now, all the 60 year mortgages will disappear from the market. This is because both the banker and the borrower are motivated to foreclose this mortgage as soon as the home values appreciate around 20%. The banker will want to book a high profit. The borrower will want to keep all of the home price appreciation as their own profit.

Please note that some changes to the 20% equity proposed for the mortgage banker might be needed. In any case the market will ensure an appropriate percentage is arrived at.

3) Will a renter want to take this mortgage?
A renter who plans to stay for a short while will not want to go for this. This is because they will be liable to go bankrupt or pay 20% of the home sale proceeds to the bank.
A long term renter will want to go for this, and afterwards they will have the motivations as any other borrower above.

4) Will owners of 2nd and 3rd homes, or speculative real estate investors go for this?
Some of them will, depending on their intention to wait for a sufficient time till the home values appreciate much beyond 20%. But somebody with a short term outlook will not go for this, again because the bank holds a 20% equity stake in the home, which reduces the speculative profits.

5) Will this product solve the global crisis?
Yes, because many lenders will be motivated to come into the market again, borrowers are a plenty and the value of the homes will increase in the short terms since the payments on a 60 year term will be around twice as affordable.

6) Should there be any regulatory or systemic changes related to the introduction of this product?
The only change might be that in future whenever the home underneath a Sixty Year mortgage is sold, it would have to be through an open auction where both the banker and the borrower are present; or to have some other mechanism to ensure mutual agreement that the home is being sold at it's correct value.



Please add to this reasoning any further insights you may have. Also, please propose any modifications you might like to.

Best regards,
Chidambaram