Radical Solution to Housing Mess 31 comments
February 09, 2009
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A Radical Problem Requires A Radical Solution
It's February 2009, and the housing/credit/mortgage crisis is still making waves. Optimistically, I thought this would have been snuffed out by now...or at least some 'working' solution would be at hand. But we know lawmakers, and their reaction seems too slow and prone to lengthening the process. Below is a possible resolution, but take a big gulp first before you read it...because you won't believe your eyes.
Leaving the Past Behind Us
Blame...it's passed around, we all know that. Too many foreclosures, too much bailout, too many lies, too much deception. Everyone deserves some blame for the housing mess we're in, ok? Bankers, brokers, mortgage companies, appraisers, buyers, homebuilders, politicians....if you've been living under a rock for about 10 years, you may be blameless. I've probably left out a few groups, too. But when do we stop blaming and start looking for answers? Do we stew in our mud and pout forever? I say NO.
The Solution
This monster needs to be dealt with not using a butter knife, but a giant sword. Let's get to the heart of it:
- Take a look at EVERY mortgage in the US.
- Government offers to pay off the ENTIRE mortgage, but takes a 35% stake in the property, only to be paid back if the home is sold.
- Government offers to pay off HALF the mortgage, but takes a 25% stake in the property, only to be paid back if the home is sold.
- Government offers to pay off QUARTER of the mortgage, but takes a 15% stake in the property, only to be paid back if the home is sold.
Morally wrong? Perhaps...but how about the subprimes? That borders on ridiculous...and the stories that have come about. What does this solution accomplish? Many things:
- Takes bad/toxic mortgages off the market for good.
- Banks get paid back their principal balances without any recourse from taxpayers; they can loan out again.
- Foreclosures will stop or slow down significantly, and if the homeowner loses his/her job...won't get thrown out of their home.
- Puts a floor under housing prices.
- Income meant to pay mortgages can be used to spend in the economy, invest or save.
If you're into golf vernacular, this is called a 'mulligan'....or a do-over. Yes, it seems wrong...but we'll never get out of this crisis without some serious action....and until the powers that be are willing to put blame behind, then we'll continue to be trapped in this web for as long as it takes.
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This article has 31 comments:
Why can't the gov't. take over where Rex & Co. left off, by offering homeowners a premium (say 15% of the house's current valuation) in exchange for a share of future profits (say 50% beyond its current market value) on the sale of the house? This would buffer the effects of the current crunch on the homeowner, allowing him to make his mortgage payments and/or renegotiate his mortgage, while being a good long-term buy for the gov't. It’s win/win.
Here's another suggestion. Since the gov't. is throwing money at make-work projects and infrastructure improvements, it seems to me that there's a project that could get under way much faster, with less likelihood of fraud or ineffectiveness than the ones I've been reading about. Namely, the gov't should offer to pay for home-improvement projects for home-owners in exchange for a share of future profits on the sale of the house. This would stimulate lots of economic activity, would upgrade the country's housing stock, would make life pleasanter for home-owners and their neighbors (who'd live in an upgraded neighborhood), and would be a good investment for the gov't. in the long run. It would also be politically popular (assuming it would work). (There are certain desirable home improvements that wouldn’t require skilled labor, such as adding fencing, and home security, insulation, and earthquake protection.) Millions could be employed nearly at once.
2. During the transitional period, all foreclosures shall be frozen, allowing American families to retain their homes. Monthly payments, the equivalent of rental payments, shall be made to designated banks, which can use the funds as collateral for normal lending practices, thus recapitalizing the banking systems. These affordable monthly payments will be factored into new mortgages, reflecting the deflating of the housing bubble, and the establishment of appropriate property valuations, and reduced fixed mortgage interest rates. This shakeout will take several years to achieve. In the interim period no homeowner shall be evicted from his or her property, and the Federal and state chartered banks shall be protected, so they can resume their traditional functions, serving local communities, and facilitating credit for investment in productive industries, agriculture, infrastructure, etc.
3. State governors shall assume the administrative responsibilities for implementing the program, including the "rental" assessments to designated banks, with the Federal government providing the necessary credits and guarantees to assure the successful transition.
This should helping in halting a "tsunami" of foreclosures, keeping millions of American families in their homes to avert social chaos, and protecting chartered lending banks of the United States and the states.
People that can pay are just walking away, which shows how morally bankrupt and financially ignorant the majority are.
The "fix" for this is to let it play out. $10 loaves of bread are not going to solve anything.
The government and their policies (off shoring, mass immigration to drive down wages-except for the top, wasteful spending, massive borrowing, forced free credit then yanking the rug out from the borrowers in '05) is the reason this is happening. And "experts" think more government meddling will fix it?
You all keep on listening to the thieves and experts. Follow the herd and enjoy your destination.
You wrote: "Why not have home owners that are going into default or in default and extend their loans to 40, 50 year loans and tack on a few percentage points for the bank. This would lower the monthly payment for the home owner and a higher rate for the bank. No Billions of dollars needed just restructuring. It looks to be a win/win situation for both sides."
You can try out your ideas with a mortgage calculator. A good one is www.mortgagecalculator...
I tried changing a 6% mortgage for 30 years to a 7% mortgage for 40 years and the payments went up. Going to 8% for 50 years and the payments went up further.
Another interesting calculation: change a 6% 30 year mortgage to a 5% 25 year mortgage: the monthly payments go down.
Try the calculator. You may be able to design some interesting refinancing plans.
Thanks for putting a lot of effort into your article. However, I think that your results miss what I feel is the essential factor in stabilizing the housing market, and the dependent debt securities. That factor is bringing housing supply and demand into balance and prices close to historic affordability ratios with incomes.
My opinion is that the quicker we get to this resolution the quicker the financial system can be stabilized. That means systemic interference may be counterproductive to resolving the problem. I think The hand gave a good summary of my viewpoint (see the first comment in this stream).
But if anyone dares to disagree with his "learned" opinions, he starts crying and claiming he is being attacked?
The Affordable Home Account does not require such a radical amount of principal forebearance which mitigates losses for lenders/investors.
It will drive down DTI levels for homeowners which "might" spur prudent spending. Particularly when provided to seniors.
Attracts private capital who see housing bottom and return to historical mean.
It will keep "some" people in their homes and prevent "some' neighborhoods from going blight or completely blight.
Re-conditioning "Senior" products like Rex will not work because their product construct does not work for this situation. Lump sums and insurance are not a prudent way out of their problem and will be seen for what they are...faulty products with not enough value for homeowner.
I am sorry but "It is what it is "
USAffordableHome.com
The Affordable Home Account
On Feb 09 05:33 AM The hand wrote:
> sorry, i don't see how this creates buyers. the problem is not foreclosures
> - there is not enough buyers who are willing to pay todays prices.
> foreclosures are happening because people cannot sell.
>
(a) assign the deeds to their crack houses in-waiting to local governments which are poised to promptly
(b) transfer them to area non-profits and to pre-qualified (i. e., experienced landlords) individual investors to restore and rent.
The deeds for these derelict properties can come with a lien requiring some form of equitable profit sharing for the original lender.
Use this technique only in communities blighted with a disproportionate number of abandoned homes.
On Feb 09 06:58 AM MauiJeff wrote:
> The government owned public housing in your city should show you
> how well people take care of what is not owned by the occupants.
> The US would be one big project, crack dealers living 3 bedroom 2
> bath tract homes. Go back to the golf course Bob.
On Feb 09 05:33 AM The hand wrote:
> sorry, i don't see how this creates buyers. the problem is not foreclosures
> - there is not enough buyers who are willing to pay todays prices.
> foreclosures are happening because people cannot sell.
>
I objected to being called dishonest. End of my objection.
Capitalism thrives on personal responsibility and private property rights. All attempts to distort this, end up worse off than where you started.
If you can't handle criticism, then don't comment. You seriously misrepresented what gramps2 wrote, and it certainly appears like you tried to put words in his mouth. No matter how much you cry about it -- that is dishonest.
You claimed you wanted to talk about the CBO analysis of the spending package, and you read that the package will cost GDP 0.1% "on net" by 2019. The quote was "CBO estimates that by 2019 the Senate legislation would reduce GDP by 0.1 percent to 0.3 percent on net. [The House bill] would have similar long-run effects, CBO said in a letter to Sen. Judd Gregg, New Hampshire Republican, who was tapped by Mr. Obama on Tuesday to be Commerce Secretary."
Then you want to argue what "on net" means? Maybe argue about what the meaning of "is" is next? Wipe your tears buddy -- that is dishonest
Changing the definition of a word that has existed for decades is dishonest -- especially if you do it to support your political slant.
If you don't know what "on net" means -- try a dictionary. Here is the entry from dictionary.com:
NET -- adjective, noun, verb, net⋅ted, net⋅ting.
–adjective
1. remaining after deductions, as for charges or expenses (opposed to gross ): net earnings.
2. sold at a stated price with all parts and charges included and with all deductions having been made.
3. final; totally conclusive: After all that work, what was the net result?
4. (of weight) after deduction of tare, tret, or both.
–noun
5. net income, profit, or the like.
To honest people, net means after you subtract out all the costs. On net, after subtracting all costs, the CBO is saying that Obama's spending package will reduce GDP.
Trying to change the meaning of what gramps2 said is dishonest. Trying to change what the CBO said is dishonest.
Self-Recapitalizing Bad Bank Plan Enables Mortgage Fix With No Permanent or Substantially Reduced Taxpayer Cost
Dear [Rescue Plan Policy Maker / Senator],
Almost all of the prior mortgage solutions have had multiple problems:
1. Ownership of the debt was dispersed and legal rights were difficult to consolidate for a fix.
2. All suggested fixes result in huge "permanent" subsidies either to debt holders or whoever, at huge permanent cost to taxpayers.
The Big Bad Bank ("BBB") Plan enables a two step solution (the second step is my idea which I have not voiced, but which I hope rescue leaders might think of and consider).
A. It consolidates ownership of debt, allowing for application of the "fix" in B.
B. "Qualifying underwater home borrowers" would get a principle write down based on current discounted market value of home at current long term low interest rates. However part of the deal is an added provision that will "run with the land," and require any future gain on resales (and subsequent resales) be split (say 50% - 50%) between the home owner and the BBB (which of course is pretty much owned by the federal government and the taxpayers), until the principle writedown, including interest) has been paid back to the BBB. The future gain to be recaptured might simply be required to be withheld by the seller (through the sales escrow), and remitted to BBB (or to IRS for administrative convenience). Through this mechanism the taxpayers and the government is merely out the initial costs for a temporary period (the $4 to $5 trillion needed by the BBB), and will eventually recoup most if not all of the costs. We would have to limit this program to those who truly need it, and deserve it. So it is reasonable to place definitional limits on "qualifying underwater home borrowers." Qualifying borrowers might be defined to include, for example inter alia, those whose earning power cash flow are shown to be unable to cover their original mortgages, but are able to cover a current fair value adjusted mortgage, and whose original mortgage did not involve any element of misrepresentation or fraud.
The average American home owner is said to change residences every 3 to 7 years. If true, this would provide a churn element promoting recognition of recapturable gains, restoring funds to the BBB and taxpayers.
In the event of a death of home owners, the realty would have to be excepted from the normal step up basis rules, and death beneficiaries and their successors would remain subject to the BBB refinanced mortgage terms and have to assume such mortgage.
Because purchasers of such realty are subject to the (say 50% - 50%) gain recapture rule (which will run with the land until the BBB recaptures its fair share of costs from the gains), the resale value of the realty is reduced. To enhance such realty's attractiveness to purchasers, the BBB might extend preferred interest rate mortgage terms to qualifying purchasers if the recapturable residual exceeds certain minimum thresholds. For example, if the recapturable residual exceeds say, at least $30,000 then a qualifying purchaser can get a preferred interest rate first or senior mortgage for a value of say 2X such recapturable residual, provided that the then current fair market value exceeds the new BBB mortgage amount by say 1.5X.
Of course I am tossing out somewhat arbitrary numbers, subject to discussion and fine tuning for various considerations and factors.
Various elements support an eventual "long term U.S. general home pricing bounceback" perspective, including among other factors:
1. It has been historically true on an overall basis.
2. The US remains for the long term foreseeable future the world leader in general overall economic growth because of various factors, especially because of the magnetic human and business environment supported by the rule of law, respect of property rights, respect of contract rights, ease of business development, capital funds development system, natural resources, education, technological innovation, equality of opportunity, et cetera.
3. Long term inflationary pressures generally increase the value of property and other non-renewable resources and devalue the value of currency.
The BBB's gain sharing rights would "run with the land," which is to say it is a perpetual right as long as the taxpayers' subsidy remains outstanding. What percentage of home realty (esp. the underlying land value) has not appreciated in value over 30 years; over 100 years; over 200 years?
Thus, if qualifying homeowners were refinanced into 30 to 50 year loans, at a reasonably low interest rate (currently under 5%, so arguably the Federal Reserve's BBB could finance at 3% rate or lower [knocking out the profits and overhead of the middlemen banks], or perhaps at a 1% or 0.5% variable interest rate above the cost of living index changes), then the underlying realty may more than appreciate sufficiently over a 40 year term to "prices" above, say 2006 values. Usually long term retail mortgage interest rates average about 2% to 4% above the inflation rate (so that banks, et al, can cover their costs and make some money). Yes buildings depreciate, and condominiums depreciate, and home structures generally depreciate, but the underlying land values usually do not depreciate (throwing out the Love Canal scenario, sure one can think of slums and failed public housing projects, among other exceptions ... but usually all of which can be redeveloped into higher value realty).
Factor #3 above of course suggest that the price recovery after 40 years results in a return to the taxpayer of a value that may be less or substantially less than the inflation adjusted return of the 2009 dollar. Arguably then, not only is there an running long term interest-principle payment factor based on the value of the 2009 adjusted market value of the realty, but there should also be a variable multiple to be applied to the built in gain recapture that is to innure to the BBB and taxpayers, which is to run with the realty to successive owners. Historically, say over a 40 year period, realty values have appreciated greater than the inflation factor [this however is a statement of opinion, based on generally observed lay impressions; and probably should be verified by economists.].
Imposing a built in gain recapture rule that runs with the land and binds successive owners, of course will affect the resale value of the realty involved, but this is part of the cost of such a plan. Instead of the simplicity and speeded recovery based on a 50%-50% gain sharing scheme, arguably, the gain recapture could be based on a ratio of the dual equities involved, but that may increase the monitoring and compliance complexities.
One conceptual difficulty may be with condominiums. For example, say the underwater realty is a fourth floor condominium; here, the property right is a primarily a right in the fourth floor unit's space. If the condominium structure at some later time is condemned and razed, and later the underlying land is redeveloped into a two floor building, the BBB's gain recapture rights might be lost unless there is a mechanism to persuade condominium or land owners in the aggregate to be subject the the BBB terms. Realty specialists and Congress will have to work that issue out.
Very best regards,
Seth Wu
Clearly, there is a great deal of bitterness by responsible Americans who bought homes they could afford and regularly make payments about the get rich quick flippers and the indigent "owners" of Mcmansions.
What I DO know is very simple - if we do nothing, home prices will continue to fal, probably another 30-40% over the next 3-5 years. So the real question is whether we're willing to let that happen or not - the answer to which I do not have.
hat I do know about problem solving is that the ultimately ideal solution is determined only if one first considers all the options. Yes, even the dumb ones....
walks like a duck, acts like a duck.
The cycle gets more vicious by the month. People in sales
related jobs are making 50%-100% less income than 3-4 years ago.
Foreclosures sit and pull the market down hard..tighter lending
Flipping? seriously..those guys are long gone and busted in the cycle.
South Florida has wiped 6-7 years of mortgage holders out of their
homes and headed for 1998 levels. I hope it stops there.. beginning
to have my doubts.
Government or no government.. default is the only answer.
Mortgages, taxes, insurance, maintenance...the golden goose is
dead... make no mistake about it.
Government has already waited to long..
The best thing is to liquidate the homes.. let the owners walk
without saddling them even more with these judgements and debts.
Get the homes affordable and in hands of people that can maintain them.
50-60% of properties in some areas are now foreclosures.. abandoned
and depressing at best. Best to expedite the whole process and give
these areas some hope. Liquidate them via auctions and I mean
absolute auctions.. we need to find the bottom asap.
I'm hoping we stop the tide at 10 year rollback. If it breaks that say
18-24 months from now.. than we could see 1980's prices re-appear.
My theory... real estate in some areas will take 10-15 years to get back to
2005 levels. Laugh at me if you wish..come back in 2 years and see
how amusing this subject is. Taxes, technology, and outsourcing have
effectively wiped out the middle class...next on the food chain is lower
and middle upper class. Depressions have no rules.
We are witnessing a roundabout debt “cancellation” or “debt reduction” RIGHT NOW.
Let me explain: the Fed has expanded money supply and will likely expand further through the repurchase of long dated treasuries. At the same time governments around the world are executing their massive deficit “funded” stimulus packages, almost certain result?... a massive devaluation of currencies and inflation which eventually result in wage inflation (nominal dollars). Those with large debt loads who haven’t already declared bankruptcy repay debt with “Zimbabwe” dollars.
Possible rejoinder: the Fed will start to increase rates as inflation rears its head. I expect the Fed to respond slowly, allowing “acceptable” rates of inflation (an end of deflation) for a period. Remember, Bernanke’s “Helicopter” answer to deflation. For those who don’t get that: Bernanke “jokingly” quipped that using a helicopter to drop boxes of cash into the market is an easy solution to deflation... paraphrasing.
On Feb 09 11:12 AM Hugh F wrote:
> The printing presses will break before they have printed the money
> that this solution would require.
It's in collapse and the banks are resisting the tidal wave. Sitting
on abandoned homes or trying to squeeze borrower's IRA accounts
is not the answer.
Write the loan down if borrowers still have an income or get them out and
liquidate at absolute auction prices. Let the government back up some
of the lender write offs. Or let the bank rent the home, maybe even back to
the defaulted buyer at a workable figure.
Again, we know the collapse is here with little recourse. However, the
quicker we let this mess bottom and get homes occupied again, the
quicker we provide stability and some sense of hope to destroyed
communities. I can promise anyone that watching the value of your home
drop 60-70% is not fun and very depressing. I'm witnessing many succesful
business people with families to raise being thrown out and worse yet
harassed by lenders looking to squeeze more blood.
The thing I see is lenders procrastinating for months with offers and
blowing off potential buyers. This is a horrible strategy and in effect
radically turning off potential buyers by the whole process. One would
think the lenders must have access to the sheer volume of inventory
creeping into the market place.
The reason the real estate market is in the tank is simple, it was overbought. Why do so many try to complicate the matter? There is NOTHING that will change this, and every one of these solution proposed just spreads the loss. I did not live under a rock for ten years, I just lived at my means, and didn't make stupid decisions. And I'm mad as hell every time some yokel calls for a government bailout.
On Feb 10 02:01 AM markg wrote:
> This is called socialism. Is this what we want to live by going forward?
>
>
> The reason the real estate market is in the tank is simple, it was
> overbought. Why do so many try to complicate the matter? There is
> NOTHING that will change this, and every one of these solution proposed
> just spreads the loss. I did not live under a rock for ten years,
> I just lived at my means, and didn't make stupid decisions. And I'm
> mad as hell every time some yokel calls for a government bailout.