In a typical mortgage reset, the payments made by a consumer to satisfy the obligation increase according to a pre-determined schedule. Let’s assume that a consumer has made payments for 5 years and has $200,000 remaining on their ARM as they reach their re-set. Their monthly payment at 6.25% over the remaining 25 years would be $1,319, and they’d pay a total of $395,000 over that span. By converting the remainder of the ARM to a 50-year term, the consumer’s monthly obligation would be reduced to $790, a savings of $529 per month.

Because the lower monthly payment represents a loss for the lender, a mechanism must be put in place to entice both the lender and the government to restructure such troubled loans. The Home Sweet Home initiative calls for an additional premium to be placed on restructured products. As a result of extending the loan, for example, the consumer’s total repayment would be increased by 20% over the new schedule. As opposed to repaying $395,000 on the initial mortgage, the consumer would now repay $475,000 - a profit to lenders and/or investors of $80,000. (The increased consumer burden would also be offset somewhat by the prospect of tax write-offs for mortgage interest.) Restructuring the loan in this manner would result in a final interest rate of 4.1%. The following example illustrates the overall approach of our "50/40" concept (50-year repayment / 40% reduction in monthly payment):

Loan Term	Loan Repayment	Monthly Payment	Homeowner
30-Year Adjustable (reset to 6.25% after 5 years)	$395,000	$1,319	Constant risk of foreclosure  Unproductive consumer
50-Year (Fixed at 4.1%)	$475,000	$790	Budget stabilized Productive consumer
Additional 20 Years	$80,000 profit to investors	$529 savings monthly for consumer	Homeowner retains home. Bank saves foreclosure costs. Loan becomes valued asset.

Eligibility

The guidelines for participation in a restructured loan program should account for a number of factors, and we would be open to a discussion of appropriate criteria with industry professionals. We would also suggest that a financial literacy component be included, to be coordinated and delivered through any of the nation’s certified credit counselors or through interactive curricula residing on the Internet. Such a requirement would improve the homeowner’s understanding of the fundamental principles of credit, budgeting and saving, while improving their chances of maintaining homeownership.

The inability to save, in particular, has forced many consumers to rely on credit, a dependency that helped bring us to our current state of affairs. An estimated 71% of Americans live from paycheck to paycheck, relying upon credit for the basic necessities. Incorporating a financial literacy component in the Home Sweet Home initiative will empower individuals to take command of their financial lives. Homeowners could begin to build substantial savings and learn to spend their money wisely, ultimately helping rehabilitate the economy.