Seeking Alpha
About this author:

In recent months, we have seen wave after wave of attempted solutions and bailouts to put a floor under collapsing housing prices with the only result so far being credit contraction and consumer strikes. In every case, the approaches have been focused on providing help (benefits) to those whose actions have contributed to the mess, whether through ignorance, greed or just plain going zig when they should have gone zag.

The problem with this focus is that it rewards bad economic decisions and in some cases even actively encourages those who are on the cusp of financial difficulty but who might be able to tough it out to actually realize that it is in their narrow personal interest to go ahead and stop paying the mortgage since that is what will qualify them for the reward of a mortgage bailout. Following this path will vastly increase government deficits, and at best just slow down house price deflation, while further decreasing the value of already horribly distressed financial assets at the banks, further eroding credit availability...resulting in the liquidity trap that everyone everywhere is trying to stop.

What is everyone missing?

What about supporting and even growing the economy, personal consumption, AND put a floor under housing prices?

How? Reward the 93% of the US population who have been prudent and still have (rapidly disappearing) equity in their houses, have good jobs, have low debts and savings.

Why reward them? Because it is in everyone's interest to do so because they are the smart and prudent workhorses of our society and they will stay smart and do the right things if we encourage it.

How? Use the full faith and credit of the United States to allow such persons *before the end of this year* to refinance their mortgage rate to the same rate as the 30 year treasury - ie 4.17%.

On a 500,000 mortgage, this would save each household $7,200 annually in house payments compared to current mortgage rates. No tax credit needed, no hocus pocus, no bailouts, no rebates. This kind of thing has been done before, notably during the return of soldiers from WWII.

In that time, you could get a below market loan from the govt and it generated a sustainable housing boom, brought the US out of a major post war recession, and started perhaps the longest boom in the history of the world and made the middle class the most solid group of taxpayers and producers the world has ever seen...and it was seen as a justifiable REWARD to the greatest generation. Now, let's save ourselves by rewarding THIS generations best and brightest families and breadwinners.

Ominously, some of these prudent financial actors took out 5 or 7 year ARMS, and by resetting the mortgages to 30 year mortgages, we can avoid the onrushing domino of truly horrifically massive mortgage resets that will happen in 2009 thru 2013 which if not prevented will doom the whole world to financial and other forms of darkness.

How would it work? The Treasury would instruct both Fannie (FNM) and Freddie (FRE) to make available to solvent, verifiably job holding, credit worthy (min 725 FICO score) current and potential new homeowners for only their principal residence a 30 year mortgage at the 30 year treasury rate plus 1/4 point. This would take off the table the ARM mortgage resets disaster waiting in 2009 -13, it would meaningfully reduce house payments for literally millions of financially savvy households, making such money available to purchase new consumer items such as automobiles, which such individuals would be more inclined to spend because their breakeven nut has been reduced, and their cash flow has been improved. An improvement in the idea might be to actually allow citizens to further buy down their interest rate to even as low as 2 or 3% so that these economically mature and wise households could provide even further tax producing and gdp growing economic activity resulting in JOBS.

But what about the banks? Isn't it the business of banks to lend money to this market? Yes. Are they doing it? No. They've just been scared within an inch of their lives, and instead of serving the economy by making prudent loans, they are stockpiling cash in truly obscene amounts or buying other banks. What are they doing with the new capital they've received? The are BUYING TREASURY BILLS rather than making loans with the money as intended. This is the monetary equivalent of a dog chasing its tail. So, if the banks won't provide the loans, someone must...and RIGHT NOW. Policymakers are pushing on a string - and the string is glued to the table - so that logjam must be broken up. And after all, the banks will make good money servicing these loans, and will realize pdq that they had better start using that bailout money because their mortgage market has temporarily gone missing, and they therefore MUST aggressively look to make loans for good risks in other markets such as supporting small businesses, new ventures and other loans.

So, let's reward the prudent homeowner, and let them reward us and everyone else at the same time, instead of potentially throwing good money after bad bailouts and embedding eternal moral hazard into the system where smart people decide that the only way to protect themselves financially is to become deadbeats too.

We have about three months left to do this...otherwise even the prudent will not have enough equity left in their houses... it will be too late.

Print this article with comments

This article has 19 comments:

  •  
    your plan sounds good.

    i wonder about the unintended consequences? like the mortgage holders which paid good money for the loan (or where the originator of the loan). they did nothing wrong either. they made a good loan to a good borrower. i am sure this would impact the profitability of many banks. not that we should exactly feel sorry for banks but we may be kicking somebody who is down. another negative consideration is if it increases the domestic debt. and i wonder if it would really stop the home value decline in the short term if we are in a state of oversupply.

    in any event. this plan deserves consideration because the overall effect to taxpayers is minimal.

    2008 Nov 19 05:27 AM | Link | Reply
  •  
    Unfortunately those you propose to reward, the responsible thinkers, don't NEED government.
    Since the goal of government is to grow in size and power, the rewards will only go to the irrespinsible, the non thinking feeler's, in our now liberal must feel good society.
    Then government will be able streamline itself into a central committee instead of representatives and a gang of nine that change our basic rules instead of the pesky super majority ammendment process.
    Glad i'm old and won't see it all come to pass.
    2008 Nov 19 08:35 AM | Link | Reply
  •  
    You are no different from the ones who want to reward those in default. Yes this could put cash back into the economy but the manpower to accomplish this would be enormous.
    1. It would take several years to process the loans.
    2. No one would want to participate because there is no profit to be made originating loans at below market prices.
    3. The cost would be staggering.
    4. The benefit would be extremely small in reality, my personal savings would be less than 1% in rate.
    5. It would destroy the entire mortgage industry because they would be dragged into a longterm welfare mortgage program for 93% of the population which doesn't want or need it.
    6. In the end the government would probably want a percentage ownership of your home, a percentage of the profits when you sell and your first born child.
    2008 Nov 19 08:54 AM | Link | Reply
  •  
    A simpler way to implement this is to allow the tax deduction of 150-200% of mortgage interest paid, not accrued. That would achieve the same effect without needing to refinance everything. Limit the deduction to pre-existing loans on your primary residence.



    2008 Nov 19 08:56 AM | Link | Reply
  •  
    Amen!
    Propping up homes going into foreclosure is the stupidest idea - dosent help the market one bit. Best thing is to speed up foreclosures and make the market attractive to the buyers waiting on the sidelines. Also these better capitalized and qualified buyers will put more money into improvements and upkeep, helping other aspects of the eonomy.
    2008 Nov 19 09:13 AM | Link | Reply
  •  
    EVERYBODY IS TALKING ABOUT A BAILOUT FOR THOSE WHO MADE BAD LOAN DECISIONS. THIS WHOLE MORAL IDEA SHOULD BE ABOUT EQUALITY, JUSTICE AND FAIRNESS.

    IF THE ARE GOING TO GIVE A BAILOUT TO DISTRESSED HOMEOWNERS, THEN THEY SHOULD ALLOW THOSE WITH SENSIBLE 30 YEAR FIXED RATE MORTGAGES TO DEPRECIATE THEIR PRINCIPAL RESIDENCE BY 150% TO 200% PER YEAR WITHOUT RECAPITALIZATION WHEN THE HOUSE IS SOLD. THIS WILL PUT MORE MONEY IN THE ECONOMY AND EQUALIZE THE PLAYING FIELD.
    2008 Nov 19 09:34 AM | Link | Reply
  •  
    Great thinking. Congratulations for comming up with that great idea! If only our leaders would start thinking similarly: reward the prudent, the backbone of America, those who can and will rebuild the economy, not those who broke it down with their greed or stupidity. Paulson, out of the way; Ben Young is here. Obama, are you listening?
    2008 Nov 19 09:43 AM | Link | Reply
  •  
    I'VE ALWAYS BELIEVED THAT YOU REWARD WHAT'S RIGHT... AND YOU PUNISH WHAT'S WRONG. THIS SIMPLE THEORY WORKS ON KIDS, DOGS AND HORSES, BUT NOT IN POLITICS.
    IF THE OBAMA ADMINISTRATION WAS EVER TO HAVE THE INCLINATION TO LEVEL THE PLAYING FIELD FOR ALL US "SAPS" WHO'VE PLAYED BY THE RULES ( MANY OF WHOM ARE IN THE 55 AND OVER CATEGORY) , IT COULD DO SO QUITE EASILY, SIMPLY BY ALLOWING TRIPLE, (THAT'S 3x) THE DEDUCTION FOR INTEREST PAID FOR AN EXTENDED PERIOD OF TIME, 3-5 YEARS SEEMS FAIR.
    2008 Nov 19 10:27 AM | Link | Reply
  •  
    Throughout this mess, interest rates seems to be holding around 6%. Dropping it down would certainly help as it makes home ownership cheaper... more first time prudent buyers would be willing to take advantage as well.
    2008 Nov 19 10:28 AM | Link | Reply
  •  
    Based upon your original premise, what about the "really" prudent ones that chose to live below their means and chose instead to pay off their mortgages in full. They are now watching their home equity and investment erode. What about reprimanding the government that caused this mess and letting the free market work. Yes, some people will feel pain and I feel sorry for these people but no one is compensating me for my bad financial decisions. Why should we single out and compensate only selective bad decisions?
    2008 Nov 19 12:42 PM | Link | Reply
  •  
    All of these "save housing" ideas are attempting to keep housing prices up which is wrong. Housing VALUE never really increased... price increases caused people to beleive there is more value in homes than they were worth. It was all a figment of you homeowner's imagination. The prices TEMPORARILY bloated and now are letting out gas. SSSSSSSSSSS, see that's the sound of your artificial wealth evaporating. As a matter of fact, anyone holing any type of asset is in deep do-do. Stocks, bonds, real estate, even gold; you name it, it all has been artifically inflated by excessive leverage in the system. As we deleverage (as last happened in the 1930's) asset prices, all assets will come down in value thus re-distributing wealth back to the people. So bring it on, keep your job if you can, and most importantly hold onto your cash (yes the dollar will probably survive for now) because the great global asset sale is about to happen and it'll be all at 90% off.
    2008 Nov 19 01:03 PM | Link | Reply
  •  
    It bothers me to no end that the people who got themselves into trouble by getting loans they can't afford and don't understand are the first in line for "relief".

    I put 20% down on my home and my DTI is 35%. But now that my house is completely underwater they won't allow me a loan modification or a short sale "because I can afford my payments as is".

    So for me, foreclosure. And for the rest, handouts.
    2008 Nov 19 04:59 PM | Link | Reply
  •  
    Qualifications For Sec-State – Delusional – WMD ARE under every Rock – Or Snipers.

    Now exactly – How are WE the People of these United States – Going to have any credibility with the world – If we keep putting our delusional foot first?

    Dear Lord – The money Changers are still trying to rule your house.

    2000 tears of not one inkling of evolving – Maybe it’s about time – To show them what happens to the Golden Calf Builders.

    Forgive them not – They had 2000 years to change.
    2008 Nov 19 05:03 PM | Link | Reply
  •  
    I like the idea of rewarding the savvy and prudent, but there is one question, who picks up the tab for the $7200 per family per year? Or did I miss something?
    2008 Nov 19 05:50 PM | Link | Reply
  •  
    Markg....


    Theoretically, no one picks up the tab. The idea is to allow homeowners to refinance their existing 6% mortgages for 4.3%. wa-la, instant lower payments for solvent households. The question is, where does the money come from to pay-off all the 6% loans? The fed would have to print, oh, I don't know, about 6 trillion dollars to do that. wa-la, rates aren't 4.3% anymore.
    2008 Nov 19 11:26 PM | Link | Reply
  •  
    Brilliant article...BUT will anyone in Wasington listen.
    2008 Nov 20 12:00 PM | Link | Reply
  •  
    I think you are on the right track by rewarding the prudent, however, there is another aspect of rewarding the responsible that would serve to better resolve the housing crisis.

    I am a semi-retired real estate broker and I think I have found a solution to stemming foreclosures. I have drafted this in the form of a proposal and have sent it to many government entities concerning the housing industry with overall very good response and has now been sent to Washington.

    Here it is:

    Many people are either upside-down on their homes or know someone who is because of plummeting home values as a result of foreclosures. This letter is concerning this group of people who may hold the key to solving the housing market dilemma but have been overlooked.

    Foreclosures are not only limited to people who can no longer make their payments, but they also include people who are “upside-down” but are otherwise financially solvent. The following is a proposal that can encourage this group of people to keep their loans and not “walk away” while greatly diminishing foreclosures. I can go on and on about the benefits of this plan but here it is:

    Problem:

    • We will not see stabilization until we can stem and reverse the acceleration of mortgage foreclosures resulting in decreasing home values. As it stands, there really isn't any way to establish and stabilize market values. They are in a free-fall.
    • Homeowners do not have equitable value for their homes so they are either "walking away" from their homes leaving them to be repossessed by lenders, or they are paying way more for their home mortgage than their home is now worth, nor may it ever be again.
    • Because homeowners are either stuck or “walking away” there is little liquidity in the housing market.
    • Financial institutions are realizing tremendous losses due to foreclosures.
    • Government is giving financial institutions huge bailout money to continue to do business as usual, not necessarily solving the problem.
    • Lack of liquidity has produced a stalemate in the housing market.
    • Defaulted/bankrupt homeowners are removed from the home buying marketplace for nearly a decade.

    Solution:

    Develop a program for financial institutions that would allow upside-down homeowners in good standing and the ability to pay to “trade-up” to a lender-owned home with a current market value equal to their existing home loan. The original lender would then own the original home whose value is less than the REO, which would be in good condition in most situations, and that home would also become available for a “trade-up” at market value. Please see example below.

    Advantages for financial institutions:

    • Greatly reduce foreclosures: Ultimately, this could have a domino effect to where lenders would eventually end up mainly owning lower value homes in foreclosure thus minimizing loss, and at a more normal percentage rate of foreclosures in the market.

    • REOs could be transferred in a “trade-up” at market value. They would not have to be severely discounted so would minimize loss and reduce speculative investors.

    • Lower property taxes and insurance on lender “trade-downs”.

    • It would discourage people who can meet their loan obligations from defaulting on their de-valued homes, thus reducing risk of foreclosures.

    • It would eventually establish viable market values and stop the downward spiral of prices. We may even start seeing a more normal appreciation in home values again.

    • Lenders could sell good established loans to other banks in the case of a “trade-up” that is between two financial institutions.

    • Lenders could retain good and stable mortgagees, which would reduce risk.

    • Lenders could charge fees and points for the transfer.

    • Improves and preserves housing liquidity.

    • Reduce bankruptcies as a result of loan defaults.

    Advantages for Homeowners:

    • Homeowners could “trade-up” to a home that was worth what they owe on their current loans (equitable value).

    • Homeowners would be able to relocate without incurring tremendous financial loss.

    • It would improve liquidity.

    • It would improve net worth, thus stimulating the economy.

    Advantages for Taxpayers:

    • This program would not require a government bail-out, just a mandate.

    • Reduce bankruptcies as a result of loan defaults.

    • Help to resolve financial crisis as it pertains to housing.

    • Government bailout money can be conditioned on adopting this type of program to help mitigate losses.

    In a nutshell, as long as prices continue to come down, foreclosures will keep going up (an economic fact), which further drives house prices down, etc. It is a chicken-egg effect. The banks are going to suffer losses either way, but this program would benefit financial institutions and mitigate losses, not only because they will get market value on foreclosures (much more than through foreclosure sales) but also because a program like this could be packaged and sold as a lending product, with all the applicable fees. Participating solvent mortgagees in good standing would be less likely to walk away from a loan with diminished value if they could "trade" it for a house that has collateral value, thus reducing that faction of homeowners who cannot justify throwing good money after bad. These loans could be saved. It would largely arrest foreclosures, thus stabilize housing prices, and it wouldn't be just handing money over to homeowners (or banks for that matter), as has been suggested.

    I believe that a program like this could help turn around the housing crisis rather quickly. The energy from this kind of positive movement could re-stimulate the housing market, thus the economy.


    Example:

    House A
    If sold through foreclosure: $110,000
    Original Loan $250,000
    Today’s value: $175,000

    House B
    If sold through foreclosure: $200,000
    Original Loan $350,000
    Today’s value: $250,000

    House C: Bank Owned
    If sold through foreclosure: $275,000
    Original Loan $475,000
    Today’s value: $350,000

    Homeowner A and Homeowner B are financially solvent, have great credit and jobs, and are easily making their house payments, however, they are questioning if it is worth it to continue making payments on a home that has decreased in value to a degree they may never recover during the life of the loan. House C is currently bank owned and listed for approximately 42% less ($275,000) than the Original Loan Value ($475,000). The net loss to the lender is $200,000. If Homeowners A and B also decide to default on their loans, the potential net loss to the lender would be $490,000, including the losses from House C through a foreclosure sale.

    Under this program, the potential net losses would be reduced from $490,000 to $300,000, not including reduced property taxes and insurance for the lien holders until the houses are filled; the more that houses are traded-up in the chain of trades, the more potential savings for the lender.

    Homeowner B trades up Original Loan $350,000 for House C at Today’s Value of $350,000. Homeowner A can then trade up Original Loan $250,000 for House B at Today’s Value of $250,000. The bank then ultimately owns a house valued at $175,000 (House A) rather than a house that is valued at $350,000 (House C), and it is not as a result of a defaulted loan on House A.

    The losses to the lenders are yet again reduced as the “trade-ups” can generate revenue through fees and selling loans to other lenders who provide “trade-ups.” Ultimately, lenders will end up owning mainly lower value homes that don’t have to be sold as foreclosures, thus again mitigating losses and establishing liquidity, which will stimulate the housing market.
    2008 Dec 28 12:40 PM | Link | Reply
  •  
    This may work for you. I need help getting this idea to policy makers in Washington. To do that you can go to my website link.

    The following is a proposal to help underwater or upside-down homeowners who are in good standing and financially solvent. I have had a lot of really good feedback from HUD and this has now been sent by them to Washington:

    Many people are either upside-down on their homes or know someone who is because of plummeting home values as a result of foreclosures. This letter is concerning this group of people who may hold the key to solving the housing market dilemma but have been overlooked.

    Foreclosures are not only limited to people who can no longer make their payments, but they also include people who are “upside-down” but are otherwise financially solvent. The following is a proposal that can encourage this group of people to keep their loans and not “walk away” while greatly diminishing foreclosures. I can go on and on about the benefits of this plan but here it is:

    Problem:

    • We will not see stabilization until we can stem and reverse the acceleration of mortgage foreclosures resulting in decreasing home values. As it stands, there really isn't any way to establish and stabilize market values. They are in a free-fall.
    • Homeowners do not have equitable value for their homes so they are either "walking away" from their homes leaving them to be repossessed by lenders, or they are paying way more for their home mortgage than their home is now worth, nor may it ever be again.
    • Because homeowners are either stuck or “walking away” there is little liquidity in the housing market.
    • Financial institutions are realizing tremendous losses due to foreclosures.
    • Government is giving financial institutions huge bailout money to continue to do business as usual, not necessarily solving the problem.
    • Lack of liquidity has produced a stalemate in the housing market.
    • Defaulted/bankrupt homeowners are removed from the home buying marketplace for nearly a decade.

    Solution:

    Develop a program for financial institutions that would allow upside-down homeowners in good standing and the ability to pay to “trade-up” to a lender-owned home with a current market value equal to their existing home loan. The original lender would then own the original home whose value is less than the REO, which would be in good condition in most situations, and that home would also become available for a “trade-up” at market value. Please see example below.

    Advantages for financial institutions:

    • Greatly reduce foreclosures: Ultimately, this could have a domino effect to where lenders would eventually end up mainly owning lower value homes in foreclosure thus minimizing loss, and at a more normal percentage rate of foreclosures in the market.

    • REOs could be transferred in a “trade-up” at market value. They would not have to be severely discounted so would minimize loss and reduce speculative investors.

    • Lower property taxes and insurance on lender “trade-downs”.

    • It would discourage people who can meet their loan obligations from defaulting on their de-valued homes, thus reducing risk of foreclosures.

    • It would eventually establish viable market values and stop the downward spiral of prices. We may even start seeing a more normal appreciation in home values again.

    • Lenders could sell good established loans to other banks in the case of a “trade-up” that is between two financial institutions.

    • Lenders could retain good and stable mortgagees, which would reduce risk.

    • Lenders could charge fees and points for the transfer.

    • Improves and preserves housing liquidity.

    • Reduce bankruptcies as a result of loan defaults.

    Advantages for Homeowners:

    • Homeowners could “trade-up” to a home that was worth what they owe on their current loans (equitable value).

    • Homeowners would be able to relocate without incurring tremendous financial loss.

    • It would improve liquidity.

    • It would improve net worth, thus stimulating the economy.

    Advantages for Taxpayers:

    • This program would not require a government bail-out, just a mandate.

    • Reduce bankruptcies as a result of loan defaults.

    • Help to resolve financial crisis as it pertains to housing.

    • Government bailout money can be conditioned on adopting this type of program to help mitigate losses.

    In a nutshell, as long as prices continue to come down, foreclosures will keep going up (an economic fact), which further drives house prices down, etc. It is a chicken-egg effect. The banks are going to suffer losses either way, but this program would benefit financial institutions and mitigate losses, not only because they will get market value on foreclosures (much more than through foreclosure sales) but also because a program like this could be packaged and sold as a lending product, with all the applicable fees. Participating solvent mortgagees in good standing would be less likely to walk away from a loan with diminished value if they could "trade" it for a house that has collateral value, thus reducing that faction of homeowners who cannot justify throwing good money after bad. These loans could be saved. It would largely arrest foreclosures, thus stabilize housing prices, and it wouldn't be just handing money over to homeowners (or banks for that matter), as has been suggested.

    I believe that a program like this could help turn around the housing crisis rather quickly. The energy from this kind of positive movement could re-stimulate the housing market, thus the economy.


    Example:

    House A
    If sold through foreclosure: $110,000
    Original Loan $250,000
    Today’s value: $175,000

    House B
    If sold through foreclosure: $200,000
    Original Loan $350,000
    Today’s value: $250,000

    House C: Bank Owned
    If sold through foreclosure: $275,000
    Original Loan $475,000
    Today’s value: $350,000

    Homeowner A and Homeowner B are financially solvent, have great credit and jobs, and are easily making their house payments, however, they are questioning if it is worth it to continue making payments on a home that has decreased in value to a degree they may never recover during the life of the loan. House C is currently bank owned and listed for approximately 42% less ($275,000) than the Original Loan Value ($475,000). The net loss to the lender is $200,000. If Homeowners A and B also decide to default on their loans, the potential net loss to the lender would be $490,000, including the losses from House C through a foreclosure sale.

    Under this program, the potential net losses would be reduced from $490,000 to $300,000, not including reduced property taxes and insurance for the lien holders until the houses are filled; the more that houses are traded-up in the chain of trades, the more potential savings for the lender.

    Homeowner B trades up Original Loan $350,000 for House C at Today’s Value of $350,000. Homeowner A can then trade up Original Loan $250,000 for House B at Today’s Value of $250,000. The bank then ultimately owns a house valued at $175,000 (House A) rather than a house that is valued at $350,000 (House C), and it is not as a result of a defaulted loan on House A.

    The losses to the lenders are yet again reduced as the “trade-ups” can generate revenue through fees and selling loans to other lenders who provide “trade-ups.” Ultimately, lenders will end up owning mainly lower value homes that don’t have to be sold as foreclosures, thus again mitigating losses and establishing liquidity, which will stimulate the housing market.



    On Nov 19 05:03 PM poncawolf wrote:

    > Qualifications For Sec-State – Delusional – WMD ARE under every Rock
    > – Or Snipers.
    >
    > Now exactly – How are WE the People of these United States – Going
    > to have any credibility with the world – If we keep putting our delusional
    > foot first?
    >
    > Dear Lord – The money Changers are still trying to rule your house.
    >
    >
    > 2000 tears of not one inkling of evolving – Maybe it’s about time
    > – To show them what happens to the Golden Calf Builders.
    >
    > Forgive them not – They had 2000 years to change.
    2008 Dec 28 12:48 PM | Link | Reply
  •  
    Many people are either upside-down on their homes or know someone who is because of plummeting home values as a result of foreclosures. This letter is concerning this group of people who may hold the key to solving the housing market dilemma but have been overlooked.

    Foreclosures are not only limited to people who can no longer make their payments, but they also include people who are “upside-down” but are otherwise financially solvent. The following is a proposal that can encourage this group of people to keep their loans and not “walk away” while greatly diminishing foreclosures. I can go on and on about the benefits of this plan but here it is:

    Problem:

    • We will not see stabilization until we can stem and reverse the acceleration of mortgage foreclosures resulting in decreasing home values. As it stands, there really isn't any way to establish and stabilize market values. They are in a free-fall.
    • Homeowners do not have equitable value for their homes so they are either "walking away" from their homes leaving them to be repossessed by lenders, or they are paying way more for their home mortgage than their home is now worth, nor may it ever be again.
    • Because homeowners are either stuck or “walking away” there is little liquidity in the housing market.
    • Financial institutions are realizing tremendous losses due to foreclosures.
    • Government is giving financial institutions huge bailout money to continue to do business as usual, not necessarily solving the problem.
    • Lack of liquidity has produced a stalemate in the housing market.
    • Defaulted/bankrupt homeowners are removed from the home buying marketplace for nearly a decade.

    Solution:

    Develop a program for financial institutions that would allow upside-down homeowners in good standing and the ability to pay to “trade-up” to a lender-owned home with a current market value equal to their existing home loan. The original lender would then own the original home whose value is less than the REO, which would be in good condition in most situations, and that home would also become available for a “trade-up” at market value. Please see example below.

    Advantages for financial institutions:

    • Greatly reduce foreclosures: Ultimately, this could have a domino effect to where lenders would eventually end up mainly owning lower value homes in foreclosure thus minimizing loss, and at a more normal percentage rate of foreclosures in the market.

    • REOs could be transferred in a “trade-up” at market value. They would not have to be severely discounted so would minimize loss and reduce speculative investors.

    • Lower property taxes and insurance on lender “trade-downs”.

    • It would discourage people who can meet their loan obligations from defaulting on their de-valued homes, thus reducing risk of foreclosures.

    • It would eventually establish viable market values and stop the downward spiral of prices. We may even start seeing a more normal appreciation in home values again.

    • Lenders could sell good established loans to other banks in the case of a “trade-up” that is between two financial institutions.

    • Lenders could retain good and stable mortgagees, which would reduce risk.

    • Lenders could charge fees and points for the transfer.

    • Improves and preserves housing liquidity.

    • Reduce bankruptcies as a result of loan defaults.

    Advantages for Homeowners:

    • Homeowners could “trade-up” to a home that was worth what they owe on their current loans (equitable value).

    • Homeowners would be able to relocate without incurring tremendous financial loss.

    • It would improve liquidity.

    • It would improve net worth, thus stimulating the economy.

    Advantages for Taxpayers:

    • This program would not require a government bail-out, just a mandate.

    • Reduce bankruptcies as a result of loan defaults.

    • Help to resolve financial crisis as it pertains to housing.

    • Government bailout money can be conditioned on adopting this type of program to help mitigate losses.

    In a nutshell, as long as prices continue to come down, foreclosures will keep going up (an economic fact), which further drives house prices down, etc. It is a chicken-egg effect. The banks are going to suffer losses either way, but this program would benefit financial institutions and mitigate losses, not only because they will get market value on foreclosures (much more than through foreclosure sales) but also because a program like this could be packaged and sold as a lending product, with all the applicable fees. Participating solvent mortgagees in good standing would be less likely to walk away from a loan with diminished value if they could "trade" it for a house that has collateral value, thus reducing that faction of homeowners who cannot justify throwing good money after bad. These loans could be saved. It would largely arrest foreclosures, thus stabilize housing prices, and it wouldn't be just handing money over to homeowners (or banks for that matter), as has been suggested.

    I believe that a program like this could help turn around the housing crisis rather quickly. The energy from this kind of positive movement could re-stimulate the housing market, thus the economy.


    Example:

    House A
    If sold through foreclosure: $110,000
    Original Loan $250,000
    Today’s value: $175,000

    House B
    If sold through foreclosure: $200,000
    Original Loan $350,000
    Today’s value: $250,000

    House C: Bank Owned
    If sold through foreclosure: $275,000
    Original Loan $475,000
    Today’s value: $350,000

    Homeowner A and Homeowner B are financially solvent, have great credit and jobs, and are easily making their house payments, however, they are questioning if it is worth it to continue making payments on a home that has decreased in value to a degree they may never recover during the life of the loan. House C is currently bank owned and listed for approximately 42% less ($275,000) than the Original Loan Value ($475,000). The net loss to the lender is $200,000. If Homeowners A and B also decide to default on their loans, the potential net loss to the lender would be $490,000, including the losses from House C through a foreclosure sale.

    Under this program, the potential net losses would be reduced from $490,000 to $300,000, not including reduced property taxes and insurance for the lien holders until the houses are filled; the more that houses are traded-up in the chain of trades, the more potential savings for the lender.

    Homeowner B trades up Original Loan $350,000 for House C at Today’s Value of $350,000. Homeowner A can then trade up Original Loan $250,000 for House B at Today’s Value of $250,000. The bank then ultimately owns a house valued at $175,000 (House A) rather than a house that is valued at $350,000 (House C), and it is not as a result of a defaulted loan on House A.

    The losses to the lenders are yet again reduced as the “trade-ups” can generate revenue through fees and selling loans to other lenders who provide “trade-ups.” Ultimately, lenders will end up owning mainly lower value homes that don’t have to be sold as foreclosures, thus again mitigating losses and establishing liquidity, which will stimulate the housing market.



    On Nov 19 05:27 AM The hand wrote:

    > your plan sounds good.
    >
    > i wonder about the unintended consequences? like the mortgage holders
    > which paid good money for the loan (or where the originator of the
    > loan). they did nothing wrong either. they made a good loan to a
    > good borrower. i am sure this would impact the profitability of many
    > banks. not that we should exactly feel sorry for banks but we may
    > be kicking somebody who is down. another negative consideration is
    > if it increases the domestic debt. and i wonder if it would really
    > stop the home value decline in the short term if we are in a state
    > of oversupply.
    >
    > in any event. this plan deserves consideration because the overall
    > effect to taxpayers is minimal.
    >
    2008 Dec 28 01:24 PM | Link | Reply