A Simple Housing Fix: Government Buy-Down of Mortgage Balances

It seems that buying into the banking system with preferred or common shares is perfectly fine to maintain our financial institutions but that a wholesale bail out of individual mortgages is not on the table. I propose a simple fix: Offer every conforming mortgage, regardless of lender, neighborhood or participant, the opportunity to receive up to a 20% buy-down of their mortgage balance directly by the government.

The bank would receive the funds from the Treasury and the mortgage payments would immediately be reduced by up to 20%. That part of the debt would be erased from the bank’s balance sheet – since the depreciation is what made the asset toxic – lots of breathing room. The amount would be no more than two trillion and represent a far better investment than buying the entire note. Before you choke, keep in mind that the average cost of a foreclosure is north of $75,000 and each one adds yet another house to the inventory.

An independent system of regional valuations would be established to determine the average appreciation of conforming loans in a specific area. The loan would be due in ten years or at the time of sale. The government would be repaid on its investment and the appreciation determined by the valuation on the sale date; point to point, with an objective valuation system. The new loan would represent a preferred share and subordinate the lender’s remaining note. The government would get paid back first (that’s you and me), the bank next and anything that might remain for the owner.

The infusion would be direct and support the bull’s eye of the problem. It would effectively mitigate the majority of the recent deflation and give the homeowner an opportunity to keep the home, albeit with a partner, and stay in the game. Staying in the game historically makes him a more responsible citizen which was, after all, the point of the riotous loan expansion.

There is no obligation to participate and no discrimination whether it be by lender, neighborhood or participant. No appraisal, few loan documents – simple. No one can reasonably complain other than to cry socialism.

Home ownership is a good thing but the jump from 65% to 69% in a few years’ time was inappropriate. Now the deed is done and the homes can’t be put back in their boxes and sent to another country, so they need to be occupied by as-responsible-an-owner-as-possible. Beautiful no, practical yes and crying foul will not do this nation any good.

This program may well mitigate the need for judges to bend contract law, banks to write a lower-profit, the homeowner to lose what little remains of his net worth and, most importantly, millions of foreclosures. Of course the risk of default does not go away but is surely lessened and, indirectly fortifying the banks for the loss is so much less efficient. Socialistic? No more than Medicare.

Comments

[Steven Hansen:]

is the problem today (not how we got here) mortgages, foreclosures, housing prices or buyers?

simply the price level is too high for the buyers. there is no demand. your proposal does not create demand or lower the prices for houses. in short - it does not solve the crisis.

your proposal just gives money away, and benefits the rich much more than the poor.

Feb 25 06:38 AM

[athena:]

Bend contract law? I have a lot of money to invest with you!
NOT!

Feb 25 06:49 AM

[But_NotEnough:]

Now you are talking! Cramer proposed a similar scenario last night. This is exactly what's required, except I say the write down has to be ALOT more - we want to stimulate, not just make it another 3 to 6 months. And to those who are 'responsible' and complain about giveaways - what 'resonsible' jobs have you been getting paid to pay your bills and save your money from, eh? Jobs with positions and salaries created, supported, and inflated by this false-prosperity 'bubble', thats what jobs!! You would have been out of work or working at McD's years ago if this hadn't come along. There isn't an industry that isn't guilty of looking the other way and living off the 'easy cash' that all this has generated - including yours!

Feb 25 08:27 AM

[crewman:]

I think your idea is a bit nuts. However, if nutty ideas which are created to artificially prop up home values are being put on the table, than I have one that would cost less money (up front). Simply allow the government run fannie and freddie to purchase no-doc (liar) loans with less than 5% down and an attractive teaser rate. You'll see this housing market go right back up to where you want it to be. A not-so-nutty idea is to let the free market do its work. In many areas of So Cal, the poster child for the housing bubble, prices are beginning to come in line with demand. For instance, in the Inland Empire, SFD homes are being offered at around $250k or less. In So Cal, that's less than replacement value - in other words, you could give me the land for free and I wouldn't be able to deliver a home that cheap.

Feb 25 08:44 AM

[kelm:]

This is completely misguided (and not at all original as I have seen the same misguided idea on SA a few times in the last weeks). Taking equity stakes in homes makes people happy but does nothing for the broader economy, nothing to re-balance the economy, and nothing to restart job creation. How is it that people who are supposedly part of the financial industry are so prepared to throw fundamental economics to the wind with ideas like this? Probably because they will profit from them.

Feb 25 08:50 AM

[markg:]

We are a free market economy. Why is the mind-set shifting to bail out every person or instituition that made poor purchase decisions.

This proposal does NOTHING to stimulate an economy that needs more jobs, emerging technology, and productivity. This proposal is more of the same thinking that got us here in the first place, privatize profits, socialize losses. No thanks.

Feb 25 08:53 AM

[a fat panda:]

Comically enough, it benefits the stupid at the expense of the prudent. This takes money from people who lived responsibly, and gives it to people who are living beyond their means. If that isn't stupid, I don't know what it.


On Feb 25 06:38 AM The hand wrote:

> is the problem today (not how we got here) mortgages, foreclosures,
> housing prices or buyers?
>
> simply the price level is too high for the buyers. there is no demand.
> your proposal does not create demand or lower the prices for houses.
> in short - it does not solve the crisis.
>
> your proposal just gives money away, and benefits the rich much more
> than the poor.

Feb 25 09:02 AM

[But_NotEnough:]

Hey, economic geniuses, this isn't the only thing that's required! Yes, this writedown has to happen, to keep most of America in their homes, and 'protectionism' has to kick in, to keep and restore America's jobs. And this writedown can't be an 'equity stake', it has to be a giveaway! And should be closer to 80% of the outstanding mortgage principal, with the banks taking the ultimate hit - it's primarily their fault and they deserve to go out of business - NEED to go out of business! American banks are harboring the biggest assemblage of con-artists in world history! This is whats needed! Period! Lift your head up and take a look at the avalanche heading your way!

Feb 25 09:28 AM

[ecliptix543:]

I become incensed every single time I read a proposal of this nature. NOT everyone in this country has a mortgage and I've not seen one single incarnation of this 'plan' that addresses any sort of reciprocal benefit for those of us that do not have a mortgage. If you geniuses are going to give away a 20% write-down, give me a check for 20% of the average house value for my area here in Florida. I could sure use a $40000 check right about now... Why must every solution begin with, "Let's just throw money at it and it'll go away!" ? If throwing money at a problem ever solved anything, we'd have the least problematic country on earth.

Feb 25 10:43 AM

[Jon Smirl:]

Even simpler fix - temporarily allow the deduction of 200% of mortgage interest paid on pre-existing loans. This could be enacted tomorrow and reduced or repealed at anytime. The costs are known exactly from IRS data. The greatest benefits automatically flow to the people paying the highest interest rates. Don't forget that people with 20 year old loans are mostly paying back principle, not interest.

Increasing this deduction would cause many low income home owners to pay no income tax. If eliminating your income tax liability isn't enough to save you, you really can't afford the house you are in.

Feb 25 10:48 AM

[Jon Smirl:]

Reducing principal is a thirty year give away. The probability that any of these loans will still be underwater in thirty years is very close to zero. With the coming inflation from the massive stimulus already baked into the system you'll probably see 100% or more appreciation from the price you paid no matter what you paid. Forty years ago my parents paid $18,000 now their house is worth $500,000. That's inflation at work. Inflation is not going away, it just takes time for the compounding effect to really add up.

Feb 25 11:29 AM

[retired avi...:]

To kelm:

The banks going under and a consequent bank run could collapse our whole financial system and ratchet up the panic level a lot, even from here. For those who hate to use taxpayer money for bailouts, how would you like a possible alternative of going to get money from your bank account and finding out the money's not there, and the FDIC deluged with more depositor insurance claims than it can handle?

His solution is beautiful in its simplicity. The banks get capital that's not free but must be paid back, they write back up some of the write downs, and homeowners get lower mortgage payments. A lower mortgage payment puts $ in pockets the same as jobs do and allows more disposable income for consumer demand to help the economy. Your statement it "Does nothing for the broader economy" is hogwash.


On Feb 25 08:50 AM kelm wrote:

> This is completely misguided (and not at all original as I have seen
> the same misguided idea on SA a few times in the last weeks). Taking
> equity stakes in homes makes people happy but does nothing for the
> broader economy, nothing to re-balance the economy, and nothing to
> restart job creation. How is it that people who are supposedly part
> of the financial industry are so prepared to throw fundamental economics
> to the wind with ideas like this? Probably because they will profit
> from them.

Feb 25 11:52 AM

[Chancer:]

Geitner's plan is a lot worse. He wants to finance private companies with cheap loans to buy the mortgages from banks, and have the taxpayers guarantee 90% of loss if loans go bad. What a deal.

Investor raises $10M. Gov't loans investor $100M at low interest. Investor buys $110M in bad loans. Investor risk of loss is limited to 10%, or $11M. Any loss over that is paid to investor by TAXPAYERS.

What do you bet that the bill for the 90% losses come AFTER Obama is no longer President. Obama gets credit for the recovery, and the poor "sap" who is President when the bill for losses comes gets the blame.

Feb 25 02:32 PM

[Skeptical Ben:]

What a nice range of comments. I agree with Chancer, this idea is better than Geitner's. It also would get a lot of populist support (although you wouldn't know it from the comments here). Nobody in governance will say out loud we should just let things play out, prices must sober up, and they can't go up until they're done going down.

Feb 25 04:00 PM

[EEB:]

How does this help stabilize the housing prices? I agree with the first comment that this really doesn't address that problem. That is a problem because, as the author noted, the real problem is the banks, and they have bad mortgage-backed assets. Stopping the free-fall in prices would help the banks.

But the proposal in this article seems more like a plan to help the homeowners. The problem with that is that the term "homeowner" is not always applied accurately. If someone buys a house with no money down and pays mostly interest for a few years and the house declines in value, then in what way does that person own the home? The bank owns the home. Even if one puts down a substantial amount, one is only a partial owner.

Instead of worrying about keeping people in "their" homes, we should worry about stabilizing prices to help the banks. As I've written before, the government should attack the supply problem. The author is correct that we built too many houses and we cannot ship them overseas. But the government could buy and hold a bunch of vacant and foreclosed houses. This would stabilize the market, and it wouldn't help those who made bad decisions very much. They would probably still lose "their" house. But they can always rent another place to live. There are plenty of available rentals.

Feb 25 08:43 PM

[Mad Hedge F...:]

Here is a novel plan put forth by a hedge fund in Florida, Derivatives Bridge, LLC. Securities backing performing mortgages worth 100% are being sold for 20% because there is no market for these securities. Have the government buy these securities for 60%, rescuing the banks, and then sell them back to the original homeowner. The homeowner then is able to refinance his home, see his mortgage principal drop by 40%, restoring his net worth, and purchasing power. The cost to the taxpayer is zero. This is already possible in some countries like Denmark. If someone offered me a deal like this I’d take it in a heartbeat, even if I had to clean out the sofa cushions and raid my kids’ piggy banks. They say necessity is the mother of invention.

Feb 26 08:18 AM

[Al-USA:]

According to the article below, it's already too late. Capitalism has degenerated into Fascism and "bought the farm", so to speak. Capitalism has no solutions for the coming 16 year Greater Depression.

More information below:
"Destruction of Demand"
seekingalpha.com/artic...
littlurl.com/b8z3e

"Recent Policy Decisions and a Greater Depression"
seekingalpha.com/artic...
littlurl.com/2it28


Below are some of the reason why capitalism degenerated into Fascism.
"The Fed's War on the Middle Class"
mises.org/story/2983

"What's Behind the Financial Market Crisis?"
mises.org/story/3111

"Economic Fascism and the Bailout Economy"
mises.org/story/3333

"How to Avoid Another Depression"
mises.org/story/3103

Feb 27 10:31 PM

[infp:]

As a renter I do not want to see any more government money funneled to homeowners. No one bailed me out when I lost money in the stock market, losing money in the real estate market should not be treated any differently.

Feb 28 11:21 AM