Common Sense: My Solution to the Mortgage Crisis 30 comments
Jim Van Meerten
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I keep reading and listening to all the news releases, and I don't see anything getting fixed. I can't believe Washington has no solutions. Why do we elect these clowns?
I have a solution for the mortgage crisis, but it's too basic and rational to be accepted. It's just the simple concept of returning to underwriting home loans.
Here's how my solution would work:
Beginning immediately, a home loan for an owner-occupied primary residence would have an interest rate of no more than 6%. Any rate above that would draw a $100,000 fine per violation.
Before any such loan could be foreclosed upon - if it had been written in the past three years - it would have to be reviewed by a special master appointed by a bankruptcy court. The property would be reappraised, the borrower's credit would be rechecked, and the loan would have to pass a standard underwriting qualification.
If any of the information had been compromised in the original loan documents, the purchase would be set aside, and the loan agreement would be rewritten by the court.
If the review determined that the borrower never had the financial ability to service the loan, the lender would get back the property without further recourse. If the original appraisal or loan terms were unfair to the borrower, the court would rewrite the loan principal amount and fix the interest rate at 6% or less, with the lending institution taking the loss.
It's very simple: If the borrower had lied, the bank would get the property. If the real-estate agent, loan originator or builder had taken advantage of the borrower, then the lending institution (which should have known better and not written the loan in the first place) would sustain the loss.
No one would get a free ride, but equity should prevail. The guilty party would take the loss.
This may not be a perfect solution, but it is a workable one - and better than anything the Washington crowd has offered. Nothing can proceed until confidence in the credit market is restored, and that can be done only one properly underwritten loan at a time.
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This article has 30 comments:
(Discussion Draft)
In order to stimulate demand for housing the US offers to provide Permanent Residence Status to individuals and their direct family who acquire a home in the US and live in it for a period of not less than five years.
Applicants (and their direct families) will be granted temporary (5year) status upon completion of the home purchase. The temporary status will provide them with a SS# and the legal status to apply for a drivers license in the State they choose to reside in.
The minimum purchase price of the property to be acquired will vary by region. The average national price will be set at $250,000.
At the end of the five-year period the temporary status is automatically converted into permanent status provided:
-The applicant has continued to reside in the acquired home.
-The applicant has performed on all of the financial obligations related to financing the acquired property.
-The Applicant has paid all relevant property and income taxes during the five-year term.
If they live their lives, as do 95% of all Americans do, then they are welcome.
Once converted into the permanent status the applicant may apply for full citizenship. If they do not become citizens they still get the right to obtain a US Passport. These passports will be similar to resident passports. They will have some distinction as to the status. The F (foreign) status concept is used in a number of European countries.
In today's world you must have a minimum of $50,000 in the bank to apply for this program. There are tens of millions of people currently outside the US who have this much capital and would love for their family to be protected by a US passport. In addition there are millions of illegal aliens who live in the US today who have the minimum capital to apply.
The program could be limited to 50,000 applicants a month. The program could be terminated or reduced at anytime. It is a short window of opportunity. The maximum could be set at 2MM. This means approximately 8mm new citizens. However I would estimate that at least half of the applicants are already living here. This would stimulate demand for 2mm properties. This would immediately stabilize home prices. The addition of 8mm new residents would act as its own stimulation on the domestic economy. We would benefit twice.
Bruce Krasting
17 Apple Bee Farm Road
Croton on Hudson,NY 10520
914 373 1007
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Some good points tho I would add the following. Special residential mortgage licenses to small banks with borrowing privileges from the Fed, with a No co-mingling of funds proviso, this would reduce costs to home buyers in lower rates. Only X-# of approved banks per congressional district to keep them local and they must hold paper to maturity.
RESPA and TILA already give the homeowner the right to rescind their mortgage if any one involved with preparing the financing committed fraud against the homeowner. The problem with giving the lender back the home in cases were client may have lied, is how do you prove it? In 95% of the cases involving mortgage fraud, the courts have ruled on the side of the consumer.
MichaelNYC, I can understand your position based on your self interest. However, if you can not operate in a system that has rigorous underwriting requirements, you should get into another line of work.
All my long life, I have signed or written contracts. The sanctity of the joint contract stretches far back in judicial history. When this is tossed out because one or both parties persist in entering or enforcing ridiculous, stupid contracts, we have a simple solution: these parties go bankrupt due to LACK OF GOOD FAITH.
This is why traditional banking made it hard to get a loan! Signing a contract with a bank meant meeting very suspicious bankers. Since bankers will cheat if unattended, I never entered any contract of great importance without consulting my accountant as well as bringing my own lawyer into the game to read and even alter the contract.
Then we have a big, sometimes rather nasty meeting where lawyers, bankers and I shout at each other. Once, when a lawyer tried to sneak a provision for $600 in a contract worth hundreds of thousands of dollars, I jumped up and grabbed the contract off the middle of the table and began to tear it up!
He had to plead with me to get me to stop and pay me a penalty of $600. Heh.
If contracts are meaningless, then why have them? All the solutions involving getting out of contracts entered in bad faith by everyone is impossible. The contracts must stand! People will lose houses! I have lost things in the past! You pay the price and go on with life.
But destroying the sanctity of a contract is terrible and dangerous: it leads to the disintegration of civil society.
I rote up a little blog about this as well at digg.com/business_fina...
THE FED CRAETES A FIXED MORTGAGE ON OWNER OCCUPYIER
HOME FIXED RATE AT 4% FOR 10 YEARS PRINCIPAL REPAYMENT
BASED ON 30 YEARS MORTGAGE.
THE FED GETS THE INTEREST AND ADVANCE THE MONEY N0O COST TO THE TAX PAYER.
AFTER THE MARKET RECOVERS WE COULD REVERT TO THE BANKING SYSTEM WITH TIGHT CONTROL ON PURCHASE DATE AND DATE OF SALE IF THE GAIN EXCEEDS THE CPI THEN THE BANKS SHOULD REQUIR A LARGER DOWNPAYMENT.
Your suggestion is clearly STUPID! Why? Because how are Paulson, Bernanke,Pelosi, Reid, Barney Frank, and the rest of the greedy motherf....kers going to make MORE MILLIONS? Your suggestion doesn't permit (on the surface) a LOCKED IN METHOD to profiteer MILLIONS like the 700 Billion deal does.
Next time (if ever) Americans have the opportunity to access cheap money, maybe we will remember how we screwed ourselves up, and look for income producing (manufacturing/export) opportunities that generate income instead of just pissing it away buying cheap foreign goods.
C.Grattan
mfi-miami.com
We can't have 4% loans on homes. Thanks to inflation. Never forget inflation! We can't have 0% down, 0% interest and 0% paid off principal loans, either. No one sane will ever lend. And if we have the government lend this way, we get hyperinflation.
We cannot let lending be lower than inflation. We tried this for the last 4 years and it is now destroying us. There is no Santa Claus. Just Satan.
I am one of those people who could have been hit with a foreclosure. I got a 100% loan with $0 down.... Low inital APR.... and Interest-only. Afterwards.... my business took a huge hit to the cashflow. However, I decided to hold onto the my previous house and rent it out. The difference was.... the increase in APR and the no-interest expiring was covered by the rental income.... that really saved our asses.
I really don't think any party can take full blame. Banks were mainly doing what their function is.... making loans. How were they to know the average wage would NOT increase???
Like C.G says.... if were making the things at Wal-mart instead of importing them.... Wages would be up and this could have been COMPLETELY avoided as people had the money to pay their bills.
Americans spent $440 Billion at Chinese food restaurants last year. You can look up how much Wal-Mart's net revenue was for the year and its no secret over 70% of items are imported.
Let's get back to buying stuff from our neighbors .. supporting small american business.
6% on every OO loan - price controls and that's going to work? 100k per violation - who will be the experts - ACORN, and will they judge based on their socialist agenda on based on how much they get in kick backs from the lender and then they'll go against the borrower (as I believe they have done in the past). These suggestions only invites abuses by the dishonest and is reminiscent of a communist dictatorship.
Some thoughts - Loan To Values are very important and there needs to be true market based pricing. As it stands today the Democrats in congress prevented the FHA from doing that even now – they want someone who is very likely to default to pay the same insurance premium as the borrower least likely to default. Shame on them. The Dems pushed a scam for years now where “down payment assistance” comes from nonprofits, in actuality in comes from the seller by increasing the price by say 10k and giving it to a nonprofit who is in the business of doing this and profiting from this. The nonprofit turn around and gifts it to the buyer, so the buyer has a “down payment” . So the FHA was forced to write zero downpayment loans which defaulted in large numbers, of course this is on the taxpayers back. When the FHA wanted to stop this scam the nonprofits took them to court and the court stopped the FHA from discontinuing the scam until congress just now stopped it. So don’t tell me there’s justice in the courts. Cong. Frank and his buddies have behaved criminally vis-à-vis FHA, Fannie and Freddie.
Having said this I also want to say that the vast majority of the people in the mortgage brokerage business and the majority (less because they have more financial responsibility) in the mortgage banking business are complicit in this mess, many on a criminal level. Wall Street – when you pay people huge percentage of the profits not contingent on final loan performance, you invite this. Rating agencies – same as Wall Street. The issue is human nature nothing else – make it so they the compensation of the people who originate and sell, deal in this paper is directly related to the loan’s performance - that’s the key.
The originating lender must have long term interest in the loan’s success - securitization the way it was done, decoupled this.
Many borrowers with and without the help of mortgage loan officers are guilty of fraud in the mortgage process. When they need the money they lie and will do anything to get it, when they default they play “poor innocent victim” . They want high, fraudulent appraisals and of course will go to the lender who will give it to them. Of course when they default they quickly become the victims of high appraisals – pleeeease!
By the way to those who feel that everything was disclosed – it wasn’t, the bait and switch in the mortgage industry is beyond what you can even imagine. To jlounsbury59, I always said that my biggest competition is the bait and switch lenders. Many consumers wanted something for nothing, what they usually got is a bait and switch.
It’s all very, very sad. Again, the issue is human nature nothing else – make it so they the compensation of the people who originate and sell, deal in this paper is directly related to the loan’s performance – and it will all be fine. This cannot be legislated through misguided left wing ideas – only through putting all involved self interest/compensation in the bucket as the loan’s performance. Don’t fight human nature, work with it.
It’s tragic to see all these very smart people up in Washington panicking. You can see the lobbyist activity at work by their “selling” of the President and legislature that the solution is for the taxpayers to pay for the bad deeds of the lending and securities firms. There is another choice. If the folks back in Washington were to be focused on the taxpayers, the solution gets easy, here is a simple 4 step plan:
1. Create a new agency to purchase NEW loans made with very solid lending criteria with the 700 billion. This would make plenty of money available in the economy to lend as it would only be used for NEW lending on purchases.
a. This would stimulate new purchases and there would be plenty of money to lend.
b. This new agency would be backed by the full faith and credit of the government thereby having lower risk which should keep rates low on this product.
2. Provide a home purchase tax credit for the next two years that is equal to $10,000.00 per year for the next 3 years for a total of $30,000.00.
a. This will also stimulate new purchases.
3. Since the loans provided to consumers were so toxic (Washington’s words), provide a moratorium on all mortgage credit reporting for loans made during the period of January 2005 to December 31, 2008 (the dates and loan time frames could be tweaked).
a. This would dramatically improve credit scores of those that have been victimized by this crisis and allow them to re-enter the market to purchase.
b. This is an important point, if they are truly seen as victims, help them, if they are not victims, don’t do it. Depending on who you talk to, this point is not clear. Personally, I see them as victims and they should be treated as such. Of course there are exceptions.
4. Modify the bankruptcy code for a new type of bankruptcy filing to allow cram downs on principal residence loans to the present market value of the property and at fixed rates of interest in line with the market. An alternative to bankruptcy is to just create a new Federal statute that allows a person to petition any court for that relief, not just bankruptcy court.
a. In effect, this is the type of loan modification programs lenders should be giving but refuse.
b. It would not impact any other debt, just modify the mortgage, call it a Chapter 8 or something similar. Do not allow it to have such a bad stigma.
c. This would bring lenders to the table on loan modification and cut foreclosures dramatically almost immediately.
You will notice, this plan is focused on the curing the problem. The problem is basic, supply and demand. We have way too much supply and no demand. The above focuses on the demand by the following:
• Addresses the liquidity crisis by making loans available for purchases.
• Addresses the supply side of the problem as it will stimulate sales thereby forcing a bottom to housing prices. Realistically, prices will most likely stay flat for a while and they should. Supply side is impacted by:
o New money for sales.
o Tax incentives to buy.
o Brings buyers who traditionally have bought and a high percentage will return to buy (they are renters now, the folks who lost their homes).
• Solution is citizen (taxpayer) focused.
• The 700 billion is a profit driven investment, not a bailout.
• The changes to the bankruptcy code would also impact the supply side as it would give more homeowners the ability to modify and stay in their homes instead of being foreclosed on.
What it will not do:
• It will not bail out the financial institutions and Wall Street for their bad loans they made.
• It will not throw good money after bad. Those that invested in these bad products will have to take their losses as with any investment.
As you can see, looking at the problem in a different way will cost the tax payers much less and focus on the “cure” for the problem.
I apologize for my jibe at you now that I have read your very thorough discussion of 10:01pm and 10:04pm. If you look at your original brief comment again, you will perhaps conceed that it did leave you open to a sceptical comment in reply.
Thanks for giving such a complete description of many abuses in the mortgage business that have contributesd to our current mess.
Not only does this proposal lack common sense, it is far from making any sense at all. Such a proposal would send the availability of credit back to the 1960's; if not the pre-depressionary years of the 1920's. Additionally, this proposal would end up costing tax payers far more than the $85 billion dollars we've already invested in, and thus acquired, in AIG through our Treasury Department. It might even cost more than the most current version of the bailout proposed to the legislature. [Check the House Financial Services website for details.]
I have several responses for you, Jim. Each one is unlike the other as they are all predicated on your state of mind when you wrote this posting.
If you were trying to boil the blood of the financial and economic professionals throughout our country, then kudos, you succeeded.
If you were trying to substantiate the beginning of your title to this posting ("Common Sense"), I truly wish that you were sharing whatever it was you were smoking at the time. With the exception of, "Nothing can proceed until confidence in the credit market is restored, and that can be done only one properly underwritten loan at a time", this posting fully lacks any common sense whatsoever.
If you were intentionally throwing a one sided proposal out in the open so that people would know, after fully analysing it, that this would be the worst of all possible solutions, then I thank you.
I agree that underwriting standards began to lose their own common sense beginning primarily in the years 1996 through 1998. These were the last years that the residential mortgage lending market had some semblance of being both prudent and stable. Maintaining the underwriting standards that were present in circa 1986-1995 would certainly have helped to avoid where we're at today. However, given the current national dilemma, nothing seems to make any sense at all - forget about "Common Sense".
The entire nation is dealing with unprecedented times. No one knows how to predict the best course of action, let alone how much intervention is required. Look at the statements of Ben Bernanke and Hank Paulson over the last 12- to 14-months. Either one of them could be accused of lying to us. My opinion is that neither one of them wanted to speak on the possibility of gloom and doom, only to attempt to keep the markets calm.
At the end of the day, greed caused this mess. Beginning with the consumer and ending with the investor - including every party involved along the way. Could this have been prevented? Yes. Where would we be today if he had? No one can say. What is most important now is for the Federal Reserve Board and Treasury Department to allow the natural course of correction to take place without excessive interference. Too little action and there will be a run on the financial markets. Too much action and it will be another decade before we see recovery.
To supply the lenders and equity investors with new projects quickly, many successful real estate developers then “levered-up” by forming guaranty entities which allowed them to guarantee development loans at a ratio of 8:1 to 15:1 relative to the cash deposits on hand. To summarize, a developer with $5MM in a guarantee company could guarantee $40MM to $75MM worth of development loans with that $5MM in cash. This number was extrapolated further since many development loans have guarantee “burn off” provisions as certain hurdles are met - e.g. once 50% of construction is complete, then a portion of the developer’s liability under the loan guarantee is extinguished, freeing up those guarantee dollars to be applied to other projects. It is important to note that the success of the first project in this example is not guaranteed; since only 50% of the construction has been completed its ultimate success will not be measured for months or years to come. By now the question of underwriting standards should be cropping up again – but now the loans in question ranged in the tens/hundreds of millions of dollars.
The points made above are only important because one of the several “other shoe(s) to drop” will undoubtedly be commercial real estate loans. By their nature, development and re-development loans made to developers/sponsors are “performing” as long as they have not burned through the interest reserve line item that is reserved by the lender at the inception of the loan. As such, it is difficult to get an accurate indication from lenders regarding the health/status of these loans prior to maturity. One can surmise, however, that with staggering real inflation / record price levels for commodities and staples coupled with rising unemployment, the need for additional residential condominium towers and office buildings could be negligible for the foreseeable future. If you look at many markets in the south and southwest both product types dot the skylines liberally. The number of institutional quality projects is increased dramatically when high-end rental apartment units are factored into the equation. In many markets, the forecasted rental rates for a 1,000 square foot apartment with glossy granite counters and five-fixture bathrooms exceed the cost of ownership for a modest home of twice the size in the same submarket. Again, some time must pass before we can judge the overall success of such projects, but it suffices to say that there are several projects that are not meeting there pro forma rental rates. However, the development loans are still performing -- until the interest reserve is exhausted completely…
Lastly, many developers of residential lots were able to finance the infrastructure and ongoing services for these projects (utilities, roads and emergency services in some cases) with bonds that mimicked the characteristics of municipal bonds, without the implied backing of the municipality. These bonds were rated and sold into the market as fixed income securities with a future income stream to be derived from the levy placed on homeowners within the “district” that was created. In essence, homeowners were paying for the infrastructure in their neighborhood(s) through the future tax payments they will make to bondholders. Again, it is too early to tell in many cases, but one can surmise how this story will end for many of the taxing districts created. Two things are certain: (1) developers and bond underwriters were paid up front to build the infrastructure and issues bonds and (2) unsold homes and foreclosures were not part of the original business plan when forecasting when/how payment streams come online – the theme has been replayed too often during the time leading up to this debacle. This is just one small example of how the subprime/lax lending issue invades other “unrelated” areas such as fixed income investments.
My overarching theme to my comments is that there were a variety of parties/interests involved in the process of inflating the latest real estate bubble. From the mortgage broker/banker at the retail level working with the end users to the Wall Street firms packaging and re-packaging (or ReRemic) the securities; to developers and equity investors that acted as the “dealer” providing supply of product in an attempt to meet the insatiable demand of Wall Street players willing to push toxic sludge/asset backed securities into both local and global financial markets; to the banks and investors willing to believe that out-sized returns were possible and sustainable in this new world of financial alchemy.
It is difficult to parse and assign blame when so many were complicit.