Richard Suttmeier is the Chief Market Strategist at www.ValuEngine.com.

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December 23, 2010 – A National Mortgage Modification Program Is

My Solution
Housing Remains Weak as Mortgage Rates Rise
1. The Mortgage Bankers Association reported that its mortgage application index fell 18.6% last
week led by a decline of 24.6% for the refinance index. The sixth consecutive weekly drop has
happened as the 30-Year fixed rate mortgage rose to 4.85%.
2. Existing Home Sales increased 5.6% in November to an annual rate of 4.68 million units. Even
so, 2010 is shaping up to be the worst housing market since 1997.
3. Additional troubled homeowners have dropped out of the Obama foreclosure-relief program.
About 774,000 homeowners have left the program as of last month, which is 54% of the 1.4
million who applied for help.
4. Foreclosure filings may have fell 21% last month, but this decrease is expected to be
temporary, as lenders revise and resubmit paperwork in 2011.
According to the Federal Housing Finance Agency (FHFA) US house prices fell 1.6% in the third
quarter and are down 3.2% year over year.
The FHFA also reported a modest 0.7% rise in house prices in October versus September.

A National Mortgage Modification Program Is My Solution

Every county in the country has a Property Appraiser responsible for determining home values for tax
purposes and local government funding. Most counties base a home's appraised value on recent
sales in the community. Homes deemed to have changed hands at a too high or too low price are not
included in the calculation. Once the homes are set for the calculation, an average-price-per square-
foot is established. The value of every home in that neighborhood can then be calculated by
multiplying its square footage by the pre-determined average-price-per square-foot. This is typically set
in late August to establish the property taxes for the following calendar year. The appraised value
versus the mortgage balance—if any—on the home determines the homeowner’s equity-- which can
be positive or negative. Homeowners with negative equity are said to be “underwater.”
With a fairly determined appraisal based on conditions at the local level, we can implement a
mortgage modification/re-financing plan. My proposed National Mortgage Modification Program is
designed to be applied to “traditional” mortgage structures--e.g. a one-year adjustable, a five-year
adjustable, a fifteen-year fixed and a thirty-year fixed. Rates under the plan are tied to US Treasury
rates as follows: 200 bps above the One-Year Bill, 150 bps above the 5-Year Note, 100 bps over the
7-Year Note and 100 bps over the 10-Year Note respectively.
Underwater participants will have their mortgages divided into two components. One component
consists of the amount of negative equity in the home. This tail is financed as a zero percent
mortgage. To qualify for the program the underwater homeowner must put up 20% of the appraised
value--which I call the mortgage buffer. The remaining balance is financed at the rate stated above for
one of the four “traditional” mortgage products.
These mortgages must be kept on the books of the bank participating in this plan as an investment. In
addition the bank collects a 50 basis point fee, and the balance of the spread above the US Treasury
goes to the FDIC’s Deposit Insurance Fund (DIF). The 20% mortgage buffer is placed in the escrow
account of the homeowner. This buffer can come from the homeowner's IRA or 401 K without penalty
and without tax consequence.
Every year, program participants have their mortgages reviewed given the new property appraisal. If
the appraised value declines, the mortgage decreases again taking funds from the mortgage buffer. If
the appraised value goes up, the mortgage balance increases by that much--, which reduces the zero
percent mortgage tail.
This plan will stabilize the housing market and put money in the pockets of homeowners.
What happens if you sell your home? If you sell at the appraised value set at the beginning of the
program, you get your 20% back. If you sell below appraised value, you get only that portion of the
20% above the mortgage amount. If you sell below the mortgage amount, you split the loss with the
bank. You do not participate in any other home price appreciation unless the sale price exceeds the
original total mortgage: the initial appraised value plus the zero mortgage tail. That windfall is shared
by the homeowner and the lending bank.
The National Mortgage Modification Program puts the borrower and lender in partnership in the
mortgage market, gives consumers more money in their pockets in an effort to spur consumption and
the economy, and gives community and regional banks a mortgage product line where profits are
generated by earning the interest spread between rate paid on consumer deposits and the interest
rate on the mortgages.
Tracking the US Capital Markets – US stocks are overvalued fundamentally and overbought
technically on both daily and weekly charts. The major equity averages straddle weekly pivots and
risky levels at 11,496 Dow, 1250.3 SPX, 2670 NASDAQ, 5136 Dow Transports and 787.37 Russell
2000. Fifteen of sixteen sectors are overvalued according to ValuEngine with only 37.5% of all stocks
undervalued. At 35% the stock market tends to find a top. Only 17.5% of all stocks are undervalued by
20% or more.
The Yield on the 10-Year Note (3.348) – This week’s pivot at 3.358 has been a magnet. My
semiannual value level at 3.479 was violated at last week’s high yield of 3.568.
Comex Gold ($1387.4) – The 50-day simple moving average is $1371.8 with this week’s risky level at
$1426.1.
Nymex Crude Oil ($90.48) – Has been influenced by my weekly pivot at $89.61. My semiannual value
level is $83.94 with my annual risky level at $97.29.
The Euro (1.3100) – My weekly pivot is 1.3079 with quarterly pivot at 1.3318. The 200-day simple
moving average is 1.3091.
The Dow Industrial Average (11,559) – I will not have new monthly, quarterly, semiannual and annual
value levels, pivots and risky levels until January 3, 2011, but this week’s pivot is 11,496 and today’s
risky level is 11,586.
That’s today’s Four in Four. Have a great day.
Richard Suttmeier
Chief Market Strategist
ValuEngine.com, (800) 381-5576
Send your comments and questions to Rsuttmeier@Gmail.com. For more information on our products and services visit
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