Happy Destiny

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    • The WSJ Is Wrong on the Housing Crisis [view article]
      This article misses a key determinate in real estate demand - New Household Formation. At the same time that seniors are downsizing, young families and will be buying. Out here in California there is a huge, let me repeat, huge number young people who will be forming households in next years and indefinite future. It is the same group of people that all th right wing Republicans are excoriating as the root cause of our trouble. These are the children of the wave after wave of immigrants that have come into the country in the last 15 years. If we would simply realize that these workers children are going to make a contribution to our country, we might be able to make the investment in education for these young people so they can get good jobs, start new businesses, and buy all those homes the old school americans are vacating... May 09 12:53 AM
    • In Need of Serious Repair: The U.S. Mortgage Finance System [view article]
      The current credit crisis arises from a simple fact – most homeowners are definitionally insolvent, ie the value of the current and long term assets is exceeded by the value of the current and long term liabilities. Therefore, due to the insolvency of many homeowners (now called “homedebtors”), the creditors are faced with the prospect of calling the collateral which secures the loans. The collective call on the loans that is occurring now is having the obvious and observable effect of rendering the whole communities of homedebtors insolvent. The collective loss of value in real estate, particularly in California, over the past 12 months has proceeded on a scale and order of magnitude that is beyond anything that any sane, non-University of Chicago trained economist could have ever envisioned. However, the fact is real value, in terms of both corporate balance sheets and the economic viability of whole communities, is being lost at a rate never seen in the history of the United States of America.
      However, one man’s economic disaster, is another wise man’s economic opportunity. Presently, the collective secured lenders to homeowners have very good long term investments. These loans are secured for the most part by single family homes purchased by individuals who have hopes, dreams, and aspirations of a better life for themselves and their offspring. These individuals still have these dreams, and a wise investor should be able to see the simple manner of capitalizing on the present situation. The simple fact is that on a per square foot basis, many homes in the fastest growing areas of southern California are being sold by foreclosing lenders for the same prices as in 2000 or 2001. Thus, any person with a long view and deep pockets can pick up a few properties, place a tenants in these lovely newer homes, and grow rich slowly.
      Why can’t wall- street take the long view. The simplest way to solve the present crisis is for creditors to in effect do a debt for equity swap with any homeowners who have a relatively good prospect for making payments on a going forward basis. A typical loan modification on a debt to equity swap would involve the lender agreeing to accept a payment based on a principal amount of 80% of the present fair market value of the property. This, however, would not be a simple write down of the principal on the note. The homeowner and creditor would agree that if the home were sold at anytime in the future, the creditor would share (50/50) in the appreciation of the property above the discounted loan amount. Thus, if a homeowner pays off the note based on the 80% present day fair market value, then the lender would still have a 50% interest in any appreciation of the property at any time it was sold. Given the historical value of real estate in California, this would probably reap incredible profits to those creditors with a long enough view to negotiate these types of deals. The only issue is that the present creditors would have to lower their short-term return expectations. However, I suspect that most to the players have already made this short term adjustment.
      What about so-called piggy back loans? Most piggy back loans were either 80/20 or 90/10 loans, where the first loan was 80% of the appraised value of the home, and the second was 20% of the appraised value. To facilitate the proposed modification, the two lenders would have to agree to take a the same share of the new loan (80% of today’s FMV). Obviously, there will have to be some government intervention to facilitate this proposal, but government intervention structured in the proper manner can force creditors to take the long view for the benefit of whole communities, as opposed to the short-term rapid market correct view, which does not take into account to subsidiary negative effects on communities as a whole.
      In short, creditors must either voluntarily recalibrate there holding period of these loans (the typical holding period is 5-7 years), and take a long view of 15 to 20 years, and decide that they too, like America’s homeowners, are investors in the equity of the American Dream.
      May 06 12:35 AM
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