A Common-Sense Plan to Stabilize the Markets, Stop The Death Spiral of Decreasing Property Values, Halt Foreclosures and Keep Americans In Their Homes
President Bush signed into law the hotly-debated financial bailout plan on October 3, 2008. In doing so, the real problem was not solved. We need to keep homeowners in their homes with affordable monthly mortgage payments and stabilize the “death spiral” in the housing market. Period.
That being said, I have a plan. If you like, share it. Email it. Blog about it. Send it to your Congressman. The only way this will happen is if you spread the word. So spread it.
The Problem
America is faced with the biggest housing crisis, and due to the ripple effect, potentially the biggest overall “financial crisis” in the nation’s history. Although there are still some details to resolve, this paper will set forth an analysis of the problem and propose a solution that is clear, sensible and attacks the problem where it needs to be;:
At the ground level.
There are three categories of homeowners who are defaulting on their mortgages:
1) Involuntarily: Homeowners who simply cannot afford the payments;
OR
2) Begrudgingly: Homeowners on the borderline of making their payments, but too many disincentives exist, in addition to the “stretch” of the payment itself, which pushes this group of homeowners to the default side of the ledger;
OR
3) Willingly: Homeowners who can afford the monthly payments but choose to “hand in their keys” rather than continue to lose money each and every month.
If we do not stop the tidal wave of defaults and foreclosures, the housing market will continue to erode as more and more inventory floods the marketplace.
Combining all of this with increasingly difficult underwriting standards and guidelines causes us to be left with a buyer pool that is shrinking and an inventory that is rising.
Growing supply. Shrinking demand.
The resulting “death spiral” creates a vortex that attracts more and more homeowners to default on their loans as they realize they owe more on their home than what it is worth. Struggling to make the payment of a loan on a home that is also declining in value is a DOUBLE WHAMMY few are willing to fight.
And if your loan is in the “negative amortizing” category (principal growing each month versus declining) then you have a TRIPLE WHAMMY:
1) high and uncertain monthly payments
2) declining home values
3) a growing mortgage balance.
No rational person would not walk away from a housing nightmare such as this one.
More foreclosures cause increasing inventories (supply)… which cause prices to continue to decline… which attracts more homes into foreclosure… which cause prices to decline further… and so on and so on and so on.
A classic: “Death Spiral”
A declining home value by itself would normally not be enough to draw such a strong wave of homeowners into foreclosure.
The vast majority of homeowners in owner-occupied homes have purchased their homes first as a place to live and raise their families, and second as a potential solid investment.
But when you combine falling values with the certain prospect that the homeowner’s mortgage payments will increase substantially (adjustable rates) and either create no equity (interest only) or worse, actually increase a homeowner’s mortgage balance with each monthly payment, then the conditions create the “perfect storm” to sweep the housing and credit markets in America, which is exactly where we find ourselves.
Background
There is only one way out of the housing and housing finance crisis in America:
WE MUST KEEP HOMEOWNERS/BORROWERS IN THEIR HOMES WITH AFFORDABLE MONTHLY PAYMENTS.
The outcome of any massive governmental intervention must result in an immediate, effective and significant curtailing of the increasing tide of homeowners who default on their loans.
There are three major issues with a subset of the current outstanding mortgage loans in the country that must be and can be solved to achieve this result:
1) Adjustable Rate Mortgages: Unpredictable, and many of them are without annual or lifetime caps. When the lower “teaser rate” period is over (anywhere from 6 months to 5 years), the monthly payment increases so high that the new payments become unaffordable to the homeowner.
2) Negative Amortization: (Mortgage balances getting larger each month) These are loans that artificially keep the “payment” lower but take the difference of “what the payment actually owed” is and the artificially lower payment and adds the difference to the principal balance. Thereby, the loan balance GETS BIGGER instead of getting smaller each month. A huge amount of these loans were written on the West Coast in what is typically described as “Option-ARMS.” And their day of reckoning is coming soon.
3) Interest Only Loans: Loans that allow the homeowner to not pay principal each month thereby reducing the monthly payment by the principal amount that otherwise would be paid in a fully amortizing loan. Although these loans do not increase in principal (like negative amortization loans), their balances do not get smaller. Therefore, the only way a homeowner gains any equity while in one of these loan products is if the property she owns appreciates.
In addition, many of these loans allow “interest only” payments for an initial period of time and THEN begin fully amortizing after that initial period (typically 2-5 years).
So how do we solve this?
It’s not as difficult as it may seem at first. There are basically four primary stakeholders involved in this crisis:
The Homeowners with Troubled Mortgage Loans
It starts and ends with the large group of homeowners who are in as serious of a financial and personal challenge that they ever will face in their lifetime. In addition, this is THE ONLY place this crisis can be resolved. To think it can be fixed any other way is not rational and will only delay us from eventually being forced to fix it at the homeowner level, or worse, deepening the crisis by delaying the inevitable solution or by the unforeseen consequences of the other more “synthetic fixes,” such as the one that became law earlier today.
Again, the only way out here is to keep people in their homes, stop the rising supply of homes, the declining price of all homes and the ‘death spiral’ from continuing to wreak havoc on American homeowners.
We would then see a recovery, which will first stabilize prices, and eventually, see prices rise again, albeit at a more normal market pace, versus the large and artificial increases driven by absurdly lax qualification guidelines and easy no barrier financing so widely available over the last several years.
Neighbors of Homeowners with Troubled Mortgage Loans
One of the most difficult challenges in creating a solution that achieves the most good for the entire housing market is the inevitable conflicts and overall fairness between any group of homeowners who receive some form of help and those who do not.
Since all Americans who own and occupy residential homes are affected by the amount of inventory and overall strength of the housing market, there is a less measurable and less immediate direct benefit for this group, but in the end, certainly a no less valuable outcome in the stability and eventual appreciation of their largest asset.
In addition, we believe our plan has achieved the least amount of unfairness among homeowners in that no principal reductions are granted, which is usually the focal point of any strong argument of inequity of a solution that by its nature will cause some legitimate concerns.
The Taxpayer/Government
Clearly, the least amount of cost with the least amount of risk in any government intervention is best for the taxpayer. A solution that grows our already high national debt the least is clearly preferable. Not to mention an answer that does not create another large federal bureaucracy which puts way too much power over our housing market and our entire economy, in too few hands is also one that all parties, taxpayers, homeowners and lenders would agree is better.
The Bondholders/Investors
Basically, the owners of the current loans themselves (whole loans) that are outstanding or owners of pieces of “securitizations” that have been issued to the marketplace and backed by a large “pool of loans”.
These securitizations are divided into “traunches,” which are basically a waterfall of rights in respect to the cash flows of principal and interest paid by the borrowers of the individual loans within the pool of loans that “back” the securitization. These traunches are typically labeled AAA (the least risky of the traunches) down to AA, A, B, etc….with the most risky called the “residual piece” (and owned by the issuer itself and/or the servicer of these loans).
Basically, the AAA’s get paid first, AA’s second and so on. The AAA piece is the highest priced piece with the least risk and, therefore receives the lowest interest rate (because it is guaranteed to be paid FIRST before the other pieces). The higher rate stuff is at the bottom of the waterfall and has the highest degree of risk because the bottom pieces absorb the losses of the entire securitization first.
Many banks, (domestic and foreign), Wall Street firms, mortgage banking companies, insurance companies, pension funds, hedge funds, foreign governments, Fannie Mae and Freddie Mac, and others have already taken huge losses on either the whole loans themselves they may own or the securitization pieces that they own.
In fact, these actual losses along with the accounting concept of “mark to market,” where the institutions that are holding these debt instruments are forced to “mark the value” of the loans or securities to the current price of the market EVEN IF THE LOAN IS PERFORMING AND EVEN IF THERE REALLY IS NO MARKET!
This alone has forced many big financial companies whose names we don’t need to rehash here to either file bankruptcy, merge with other stronger and bigger institutions, be bailed out by the government, receive loans and guarantees from the government, be forced to merge by the government with other stronger private entities or be taken over by the FDIC in a few of the bank situations.
When you are forced to “mark to market” loans or securities that are performing and where there is no market price, suddenly, your assets are reduced to a very low number. Then your own banks stop lending to you because your assets are suddenly NOT worth what they were the day before you ‘mark’ them down and parts or all of your capital and/or net worth is wiped out in the process.
“Wallah.”
This is how so many household names were operating soundly with thousands of employees on a Tuesday as they have for many decades and then on Wednesday morning they are either “gone” or turned very quickly into something else.
The Recently-Passed 700 Billion Dollar Law
The recently-passed $700 billion law (aka the Troubled Asset Relief Program or TARP) sets up the feds to BUY whole loans and securitizations from the various owners of these securities to “clean the balance sheet” of these institutions and rid them of their “bad debt,” theoretically freeing their balance sheets to stay in business.
Although the passing of this monumental bill may eventually restore some confidence and stability in the banking system and credit markets (though you couldn’t tell from the stock market, which fell over 450 points from the time the House passed the bill at 1:00pm until the close of the market at 4:00pm), it will do absolutely nothing to stop the carnage and “death spiral” in the housing market.
The theory of this new law is that the government will potentially “modify” some of these loans and therefore, the housing market will recover and maybe even the government will not lose so much on the securities they bought as prices of these securities recover.
There is a huge price any institution will pay to the feds in the form of actual equity issued to the government for any “losses” the government takes on in the ultimate disposition of these loans and securities.
The law gives the Secretary of the Treasury huge sweeping powers to fill in the blanks on many of the very complex details involved here and creates another bureaucracy that is both expensive and unnecessary.
There are conflicts all over the place that are unaddressed surrounding the servicers, owners of the loans and securities, the seller’s of the loans, etc… Some of the basic questions such as the following have not been answered:
1) How will the fed agree to a price to buy these loans and securities? A “reverse auction” has been mentioned. That does not work considering that each loan and each security is very different from each other. How will “the seller offering the lowest price” be the seller of their assets to the fed when there are no two assets that are even close to being alike?
2) The lower the price an institution sells to the fed then theoretically the less amount of EQUITY that the selling institution has to “give up” to the fed to reimburse the fed for buying their bad or unsaleable assets. That means that there will be a huge conflict in the fed’s goal of strengthening these institutions (by removing the bad stuff off their balance sheets) and the incentive for the institution to actually sell the loans and securities for the LOWEST price when most of them probably believe it would be better to take the hit now then give away huge chunks of equity to the government.
3) How does cleaning up the balance sheets (highly questionable if it can work) going to help the homeowners and borrowers who are in trouble? Cleaning up these balance sheets and buying weaker assets does not increase lending to American homeowners by one penny. Although guidelines have toughened everywhere, there are still numerous banks, credit unions, mortgage bankers and mortgage brokers where borrowers can get approved for an FHA, VA, Fannie Mae or Freddie Mac type loan. The fact that some of these banks now have some room on their balance sheets does not mean they are going to expand into loans that are not offered in the market now by numerous companies. Certainly, offering loans with expanded or different underwriting guidelines is not the goal is it? Isn’t that what got us into trouble in the first place? At maximum, freeing these balance sheets will only allow some additional room on some lenders’ balance sheets to offer the SAME FHA, Fannie Mae and Freddie Mac loans that are already widely available.
4) Only the weakest entities will utilize the plan. The severity of the pricing and the restrictions on compensation will mean that only those that HAVE to use it will.
5) This means the plan will be adversely selected. In a sense, the weak will be assisted directly, the strong, only indirectly.
6) If the government begins aggressive workouts of the loans it purchases, then only a random lucky few will find themselves the recipient of a bailout.
a) If Joe borrowed $300,000 to buy a $300,000 home and if Joe lived extravagantly, and if Joe was financed by Weak Bank that sold to the US Government, and if the home is now worth $200,000 - Joe may well get his balance written down by $100,000 - or some other major benefit to “work out” his loan.
b) If Sue, Joe’s neighbor, saved hard and put $100,000 down to buy her $300,000 house, and if Sue lived within her means and Sue was financed by Strong Bank - Sue likely won’t get helped at all.
c) If Sam, Joe and Sue’s neighbor, borrowed $300,000, and lived just like Joe, but Sam was financed by Strong Bank (and wasn’t sold to the government), Sam might not be offered any help either.
7) This kind of massive inequity will create chaos:
a) Tremendous resentment will result when those who did the right thing see their spender neighbors get bailed out.
b) The logical outcome will be for those who maintained their payments to either go delinquent to get help that is being doled out or to walk away from their homes altogether.
How long will it take for the $700 billion law take to make any impact? This solution will take months to even get rolling. The complex nature of loan by loan modifications or refinances and the complex nature of buying these loans and securities which are all unique and need their own individual due diligence is an enormous task and one that the federal government is ill equipped to execute. In fact, many companies that have been in this complex business for years and years are not equipped to do this work.
This new law is the biggest “rescue plan” in world history developed by a handful of well-intended folks in Washington reacting understandably to the immense pressures of the increasingly shaky and nearly out of control credit markets.
But this new 700 billion dollar law will not solve the root of the problem:
The Housing Crisis.
Not even close.
And it must be solved.
Now.
There is a better way. A cheaper way. A quicker way. A more effective way. The RIGHT way.
The Solution
There is a solution that…
1) Keeps homeowners in their homes with predictable FIXED amortizing monthly payments.
2) Costs the taxpayers FRACTIONS of the 700 Billion dollar “rescue plan” with less complication and bureaucracy.
3) Gives the investors and owners of the loans and securitizations significantly higher odds of recovering their investment in these loans and securities versus the expensive foreclosure and resale of properties in a declining “death spiral” of a housing market.
4) Will stabilize prices, stop the free-fall in home values (the heart of the entire catastrophe).
5) Can be implemented in a very short time frame.
The federal government should enact a bill that applies to the following loans and homeowners:
1) Adjustable Rate Mortgages (ARM) that do NOT have a 2% or lower annual cap (or the intervals of adjustment greater than one year without a 2% or lower interval adjustment period) and a 6% or lower lifetime cap (this covers much of the bad sub-prime ARMS out there)
2) Any “Option ARM”. (OARM) These loans were taken out by prime borrowers with larger loan amounts primarily on the West Coast. These homeowners are destined for trouble. They have mortgages with significant negative amortization, which inevitably will produce the same kind of adverse payment shock inherent in subprime ARMs.
These loans create negative equity because they have built-in negative amortization. Homeowners with these exploding mortgage balances face both negative equity andhuge payment shock. In essence, these loans convert prime borrowers into the most adversely affected subprime borrowers. Not to mention plummeting home values.
3) Any “Interest Only” (IO) loan, adjustable or fixed, that is scheduled to turn into a “fully amortizing” loan in the next 4 years.
The servicers of any loan who meet the above criteria will be required under this proposal to:
1) Reset the borrower’s rate and term immediately (in the next 90 days regardless of when their next adjustment is due) to a 6.375%, 30 year fixed rate fully amortizing loan.
2) For a period of 3 years from the “reset date” the federal government subsidizes the homeowners 6.375% principal and interest payment so that the homeowner is actually paying at a 4.875% rate, on a 30-year fixed, fully amortizing program.
The bondholder/investor gets paid at 6.375% but the borrower pays as if she is paying at 4.875%. In other words, 1.5% of government subsidy for these loans for the first 3 years or 4.5% max per loan. (Many mortgages will have less than this cost as some borrowers and homeowners will sell their homes and move or potentially even refinance to other available products during these first 3 years).
3) In the 4th year the subsidy is reduced to 1.00% bringing the homeowners’ paying rate up to 5.375%. In the 5th year the subsidy is reduced to 1/2% bringing the borrowers’ paying rate to 5.875% and in the 6th year there is no more subsidy and the homeowner is now in his 6th year of a fully amortizable 30 year fixed rate paying 6.375%. And it stay fixed from the 6th year through the 30th year or until the borrower sells the home or refinances.
4) The owner of the whole loan or the trustee of the securitization should get a one-time shot or incentive to “write off” any “negative equity” (actually, deferred interest) that has been built up since the beginning of the loan until the time of the reset. The investor is entitled to receive 2X the normal write off should they forgive the borrower’s deferred interest (a very strong incentive at 2X the write off). Obviously, the borrower’s should not be taxed on what amounts to a forgiveness of deferred interest.
5) The borrower must have lived in the property since obtaining the original loan and must currently live in the property. Basically, owner occupied only.
6) Void any and all pre-payment penalties on these loans.
There is no need to tamper with the principal amount if the homeowner is given affordable long-term fixed-rate financing, and therefore can afford monthly payments. (Homebuilders have been providing subsidies for decades when, during the course of building out subdivisions over many years, there are times when house values have decreased. They do this to maintain nominal values. Indeed today homebuilders are giving subsidies of approximately 19% of selling prices in order to sell homes without reducing nominal values).
The least expensive, least risky and fastest way to keep homeowners in their homes, without potentially modifying or refinancing millions of mortgages at enormous cost to financial institutions and our own government and taxpayers, is to give homeowners affordable fixed rate financing for a long time period. The risk of adverse payment shock is 100% eliminated. Simply doing this will significantly reduce foreclosures, stop the “death spiral,” stabilize home prices and at the same time not be an outrageous cost to U.S. taxpayers.
Especially compared to $700 Billion.
In addition to the loan-specific pieces of our proposal, we agree with the many other voices that are calling for a change to the “mark to market” accounting rules that have been equivalent to throwing lighter fluid on a fire. Although there have been various proposals made as to how to change this rule for the better, here is one way to approach that piece of the puzzle:
Revise “mark to market” accounting rules to allow holders of performing and current residential loans and securities where the market that would normally indicate a dependable price is either too thin or simply does not exist to book these assets at the purchase price or face value.
Benefits To The Homeowners
Let’s take a look at the significant benefit to the borrower’s who will be helped by this plan. Whether the borrower falls into any of the three categories outlined above: ARM, OARM or IO, the overall theme is:
1) Fix his payment at a subsidized lower rate for a period of 5 years and fix it for good at a solid rate in years 6-30.
2) Stop any negative amortization (and hopefully, write off any existing negative amortization/deferred interest).
3) Begin regular principal and interest payments immediately thereby making sure the borrower is actually “digging out” with each payment versus “treading water” or even “sinking deeper.”
Example One
A married couple bought a home in June 2006 for $222,222.00 and obtained a 90% loan-to-value (LTV) loan creating a $200,000.00 mortgage loan on a “2/28 ARM” with the first two years fixed at 6.5% principal and interest, which gave them a monthly principal and interest payment of $1264.00 for the first 24 months.
In August of 2008, the 2/28 mortgage plan adjusted their rate up to around 9% with a corresponding adjusted payment which now increased to $1595.00, which is a 26% increase AND the payment now adjusts every 6 months going forward to a margin of 6% OVER the LIBOR index, which we all know is a very unstable index that can have dramatic rises in short periods of time. The LIFETIME cap on these loans are as high as 7%-10% over the start rate, meaning a sub-prime ARM could rise as high as 16.5% in this example!
This proposal would move this homeowner to a 4.875% 30 year fixed rate fully amortizing loan with a payment of $1034.00 which saves this homeowner:
$561.00 savings per month and savings of $6,732.00 in the first year.
$661.00 savings per month and savings of $7932.00 (or more) in Year 2
$761.00 savings per month and savings of $9132.00 (or more) in Year 3
Total savings $23,796.00 over 3 years.
Years 4 and 5 will save the homeowner an approximate total additional savings of $13,500.00.
The principal will have been paid down to approximately $182,600.00, or $17,400.00 since the original $200,000.00 loan was funded.
This plan put this homeowner ahead by:
$54,696.00 over the first five years
It FIXES their rate and payment in for 30 years (with an additional subsidy the first 5 years).
These homeowners begin to pay off their loan faster and by removing any pre-payment penalties have the option of applying any of the payment savings to payoff principal faster.
The borrowers will now be making payments in a STABILIZED housing market and although they still may be under water for a period of time, there is a light at the end of the tunnel in that their payments are affordable, their loan is being paid down and their payments cannot go up.
In addition, their property may rise in value somewhere down the road which would even be a bigger win.
Example II
Another family took out and closed on an “Option ARM in June of 2006. Same as above. $222,222.00 purchase price and a $200,000.00 loan amount.
The homeowner made 24 payments and his principal GREW to $216,000.00 because of the negative amortization (deferred interest) and his “option” of making the “lower payment” and deferring the “difference” of what the real payment would be and adding that “diff” to the principal.
In addition, his house has LOST value.
Each payment he makes GROWS his principal.
His house is continuing to go DOWN in value.
And soon his payments will GO UP based on the terms of his current Option ARM loan
Our plan incents the owner of the loan to write off the deferred interest of $16,000.00 dollars in exchange for a double tax deduction.
The homeowners lock in their payments at the same rate and terms as described in “Example I” above.
Again, huge SAVINGS in the monthly payments for at least 5 years.
FIXED PAYMENTS AND ZERO CHANCE of payments going up over the very good rate and payment of 6.375%.
NO MORE negative equity (deferred interest).
Their loan begins to immediately amortize so balance is now DECREASING each and every monthly payment they make going forward.
They are now in a STABILIZED housing market.
Get the picture here?
Homeowners could live with a period of time where they are “under water” but NOT if their home continues to go down in value, their balance does not amortize or worse yet, goes up and there is near certainty of their PAYMENT rising as well.
Our plan takes care of all of this and then allows the borrowers (and the resulting stabilized housing market) to work their way out of the “upside down” situation this family finds itself.
Psychologically, it is now a “temporary” circumstance from the homeowner’s outlook with a strong light at the end of the tunnel.
Cost To The Tax Payers
There is about $12.1 trillion of total residential mortgage debt outstanding according to OFHEO.
$900 billion of this total is in sub-prime ARM loan balances (7.4%).
$500 billion worth of “Option Arms” are out there and about to explode (4.1%).
$600 billion represents “interest only” loan balances, both fixed and ARMs which are not sub-prime or option ARMs (5.0%).
$2 Trillion Total of the most risky loans in our housing market (16.7%).
Approximately 70% are owner occupied (This proposal would only apply to owner occupied loans).
For this and other various reasons, let’s assume that 50% or $1 Trillion worth of these loans take the government up on this offer should it become law.
Under our plan, the maximum amount any single loan could be subsidized totals 6% (see 5 year plan above).
With some early payoffs, amortization of the loan amounts, etc…we conservatively will use a 5% average subsidy, spread out over a total of FIVE years for the program.
5% of 1 trillion equals 50 billion.
$50 billion over 5 years (weighted more in the first 3 years) versus $700 billion dollars in the first year.
Plus some amount of reduced taxation revenue due to the proposed double tax deduction for the write-off of any deferred interest mentioned above. But the cost of this tax incentive would be dwarfed by the resulting massive write-offs from a plunging and devastating housing market.
5 MILLION homeowners stay in their homes with VERY LOW FIXED RATE AMORTIZING PAYMENTS.
Not a dime of principal is forgiven, unfairly hurting the neighbors and neighborhoods who undoubtedly will live very near and around the five million homeowners who will receive the benefits of our plan.
Because home values are a function of the amount of inventory and recent sales prices of similar type and sized homes in the same geographic area, a strong case could be made that any and all neighbors of a homeowner who receives our proposed “bridge of help” benefits significantly in the resulting stability of the value of homes in the entire vicinity. It is important to note that this outcome is achieved WITHOUT forgiving a dime of “principal,” which would be sure to ignite a firestorm of justifiable cries of inequity. Especially, when any potential “principal forgiveness” would be administered in a random discriminatory nature based on the luck of whose loan ended up with which bank that happened to be an institution that was forced to sell it to the government.
Immediate stabilization of the housing market.
Bondholders and owners of the whole loans are THRILLED.
Yes, they reduce their “theoretic” rate of return in many cases, but how much ahead are they versus foreclosing, losing 30-50% of the loan balance and continuing to spread the “death spiral” of the housing market which will only hurt all of the other home’s values they also will have in their unsold inventory of Real Estate Owned (REO).
And what’s wrong with a 6.375% rate of return and eventually getting most or all of your principal back?
Conclusion
The recently-passed 700 Billion dollar plan does NOT get our country’s housing market even close to being on the road to recovery. Although it may restore some confidence in the banking system, this new law is incredibly expensive, creates another unnecessary federal bureaucracy and does NOT in any way, shape or form address the root problem:
KEEPING HOMEOWNERS IN THEIR HOMES AND STABILIZING THE “DEATH SPIRAL” IN THE HOUSING MARKET.
Our plan does the job and costs $50 Billion (at most) spread out over 5 years. That’s 1/14th the cost — or 7% — of the 700 billion.
Our proposal here or a similar one must be launched in the very near future to avoid a housing and economic calamity the likes of which we have never witnessed.
To paraphrase a Henry David Thoreau quote, we can find a thousand ways to hack at the branches of this enormous problem or we could strike at the root.
It will take a herculean effort to do so, but not one that is unprecendented in our great nation’s history.
After all folks, let’s not forget that this is the United States of America.
Dan Gilbert
Chairman
Rock Holdings, Inc.
PS: I would like to thank two colleagues and good friends of mine who contributed to this plan: the Former Chairman and CEO of Pulte Homes, Jim Grosfeld, and the Chief Economist of Quicken Loans, Bob “Bobbeh” Walters.
PSS: If you like what you’ve just read, help us spread the word. Find out what you can do now!
59 Comments
I am just sharing a comment and suggestion which I made 2 years ago, when this market started to rear it’s ugly head, to a good friend, who is a Realtor, and to some of my peers at Quicken Loans. I wish there was a way the State(s) could somehow mandate a strict law which will offer serious consequences to those homeowners who “can” afford their monthly payments, but desert their homes. I know of someone who had a custom home built, lived in his cuurent home of residence during construction, did not make any mortgage payments for the last 3 months, as he knew the “foreclosure” process would take at least 90 days to even get started. He one day, just called the movers and they loaded up the trucks and off he went to his new home. Just walked away from his home and never looked back. This type of person hurts this industry in huge proportions. It is unfair to those who truly have no choice but to bail/vacate, from such things as job loss, huge medical bills, death in family, and other reasons. The fact this this Country allows for people to get away with this, is a travesty. Mandated rules and laws must be put into action. Also, make it harder on those selfish individuals living the high life such as the one described above, to file Bankruptcy. We need to gain control of those people who maliciously damage an already delicate Housing Market (crisis) whereby they have severe penalties, possible “criminal” charges placed against them. Some could care less they have a low FICO, especially the guy (above) living in his new custom home. He got what he wanted, now didn’t he. Thank you for listening. A proud QL employee, responsible homeowner, and concerned citizen.
[Reply]
What does the housing crisis have to do with a tumbling stock market?
[Reply]
Complex Guy (1 comments) Reply:
October 16th, 2008 at 1:20 pm
This is a great question Monica and nobody is answering it! So allow me to take a stab. The short answer to your question is: credit. I’ll explain but first, some background: The entire global economy finds itself experiencing something called complexity. Lots of 40-lb brains have defined it but the easiest way is to say that you are experiencing complexity — or in a complex situation is when what you used to do quits working. Before complexity, if “a” happens, then I can do “b” to fix it. Well in a complex situation, “b” doesn’t fix it anymore and may even make it worse. Welcome to the wild and whacky world of complexity!
The $700B bail out is a good example of “b” not working. What we really need going foreward is a period of stabilization and consolidation (and cooler heads) in the capital markets, so we can understand what’s happening in the economy and let some recognizable patterns re-emerge so we can get back to understanding “a” vs “b”.
Now, back to the answer to your question: credit. It (used to) take credit to buy a house, but because of the deregulation pushed through by the Clinton administration, banks “loosened” their restrictions (oversight) on the investment banks. Couple that with the Bush administration letting Greenspan reduce interest rates in some paranoid fantasy about inflation, and you have the gamblers dream: easy money. The investment banks knew there was no one watching and hey, what the heck, it wasn’t their money they were loaning. Then who’s money was it? Well, not only does the consumer use credit, but so do the banks. The banks get their “credit” from the federal banks (treasury) - the government. The investment banks that collapsed used credit to speculate - billions of dollars loaned to them by the federal banks. It wasn’t widely publicized but the investment banks like Bear Stearns have billions in cash on hand. So why did they need a bailout? Because they used credit — OPM (ala credit) to speculate in the Dow and in the mortgage bond markets, which are global markets and why the rest of the world is sharing the pain. To find out more about how the mortgage bond markets got started, read “Liar’s Poker” by Michael Lewis. You see, there was this broker named Lewis Ranieri at Salomon, and he…well, it is a hilarious read and also written well enough to understand how this all got started.
Back to the answer: credit. Credit depends on something called Risk Analysis. According to an article by James G. Rickards, (http://www.washingtonpost.com/wp-dyn/content/article/2008/10/01/AR2008100101149.html) “Wall Street and regulators relied on complex mathematical models that told financial institutions how much risk they were taking at any given time. Since the 1990s, risk management on Wall Street has been dominated by a model called “value at risk” (VaR). VaR attributes risk factors to every security and aggregates these factors across an entire portfolio, identifying those risks that cancel out. What’s left is “net” risk that is then considered in light of historical patterns. The model predicts with 99 percent probability that institutions cannot lose more than a certain amount of money. Institutions compare this “worst case” with their actual capital and, if the amount of capital is greater, sleep soundly at night. Regulators, knowing that the institutions used these models, also slept soundly. As long as capital was greater than the value at risk, institutions were considered sound — and there was no need for hands-on regulation.”
So Wall Street and the regulators basically were running on auto pilot. But wait, there’s more! Rickards goes on to say: Lurking behind the models, however, was a colossal conceptual error: the belief that risk is randomly distributed and that each event has no bearing on the next event in a sequence. This is typically explained with a coin-toss analogy. If you flip a coin and get “heads” and then do it again, the first heads has no bearing on whether the second toss will be heads or tails. It’s a common fallacy that if you get three heads in a row, there’s a better-than-even chance that the next toss will be tails. That’s simply not true. Each toss has a 50-50 chance of being heads or tails. Such systems are represented in the bell curve, which makes clear that events of the type we have witnessed lately are so statistically improbable as to be practically impossible. This is why markets are taken by surprise when they occur.
I encourage you to go to the URL and read the whole article. Rickards concludes by saying that: “As long as Wall Street and regulators keep using the wrong paradigm, there’s no hope they will appreciate just how bad things can become. And the new paradigm of risk must be understood if we are to avoid lurching from one bank failure to the next.”
In my opinion, our financial folks need to go back to the basics of blocking and tackling whe it comes to credit. Hey, here’s my idea - make credit card interest tax deductible and see what that does to the economy. It used to be!!
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Great idea. I want to learn more about this proposal. How can we get the government to see the light?
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Why not amend this with a discount fixed rate mortgage (4.875%) incentive for all home buyers. This will immediately reduce excess housing inventory, and stimulate construction activity/jobs — very badly needed here in Michigan. Similarly, discounting mortgage rates for refinancing across the board would benefit ALL homeowners, not just those in distress, and provide the equivalent of a national economic stimulus plan in the process. Surely Fannie and Freddie could subsidize these discount plans and mortgage companies like Quicken Loans can benefit from refinancing fees and new business.
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I have owned a mortgage company in Northeast Ohio since 1997 and have been formulating ideas recently about an effective way to deal with this critical issue. I have never put a homeowner into a pay option arm and only did 1 or 2 2yr arms for customers just out of bankruptcy. The point is that I have always had my customer’s best interests in mind when I structure a loan program.
It is a no brainer that the government will botch this left to their own devices and I believe that they realize that what they have won’t work. I believe they put something in place to avoid mass hysteria by the general public and are hoping to come up with a real plan down the line, which hopefully means they would be receptive to plans such as yours that make sense.
Frankly, I like your plan more than the ideas I have come up with except in one regard. I believe that it is critical to stimulate the housing market (believe it or not, not for self serving reasons as a broker)and to help restore more quickly, some of the equity that has been stripped from homeowner’s. I think there is a certain segment of homeowners that will still have too much incentive to walk away from their homes if they are upside down on the mortgages. Many homeowners are in a position where they need to either upsize or downsize, let alone those who need to move for work etc.
Your basic plan seems like it would go a long way to improving the situation, but I would suggest that, in some fashion, provision is made to stimulate the housing market. Perhaps a provision could be included that would allow all mortgages to be assumable subject to certain criteria and to give some amount of principal reduction to the buyer so that they have incentive to purchase a home that would otherwise not be worth what they will owe on it. Although I don’t believe that many individuals would discuss any help they were given with their neighbors, I believe that something like this would curtail any animosity among neighbors because people could only receive the benefit as a new buyer. This would help keep a free flow of home sales even though people might, on paper, be upside down. I also think that if a homeowner is in the group that has had their rate corrected, and if that homeowner has made as agreed payments for a designated period of time, that they become eligible for some amount of downpayment assistance to purchase a new home. Since so many people have been stripped of their equity, more homeowners find themselves not netting anything when they sell their homes. Although the statistics show that the default rate is higher without a contribution from a buyer, these buyers could be subject to more stringent underwriting criteria such as reduced ratios if they do not put their own funds into the deal.
By adding such provisions, even an increased number of borrowers would beneift from the reduced interest rates attached to qualifying properties while the borrowers who were initially helped are sooner free to move on and get suitable financing for a new home from legitimate sources.
Good luck getting the word out!
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Sue Evans (2 comments) Reply:
October 12th, 2008 at 7:28 am
It’s comes as no surprise that reviving the housing market is vital to the economic growth and recovery of our country. I am surprised that none of these so-called-experts have done anything to come up with a real plan that will actually help the home owners stay in their homes. Or if they have, no one has heard of it. If the government really wants to help the people and help the economy, they need to come up with a deferred payment plan for these people who have lost their jobs. People are being forced into foreclosures and bankruptcy through no fault of their own. I don’t understand why banks and mortgage companies are forcing people out of their homes? Forcing people out of their homes doesn’t help anyone. Not the banks or the people. And - certainly not the economy. Do they not realize that when homes are placed in foreclosures that neighborhoods go down and property values are lost?
My “Bail out Plan” for the people (not Wall Street) is simple. If you have lost your job due to layoff, then you should be able to qualify for a deferred payment plan; just the same as you would qualify for unemployment. This may mean that your 30 year mortgage may turn into a 31 year mortgage, but at least you would be able to keep your home and not be forced out. Most homeowners value their homes and they want to protect their investments just as much as the mortgage companies do. If they didn’t they would have never bought a home in the first place.
There would have to be guidelines in order for homeowners to qualify for a deferred payment plan. Homeowners would still be responsible for the up keep, maintenance and insurance on their homes. Homeowners would be required to seek employment. Once the homeowners obtained employment, the mortgage companies would be required to reevaluate the homeowners and work with them to come up with a payment plan that would be affordable based on their monthly income. After all, wasn’t that what they were supposed to do in the first place? There may need to be time restrictions for being on a deferred payment plan. The deferred payment plan should not an incentive for people to stay at home, draw unemployment and go on welfare. It would need to be designed to help the people get immediate relief in a time of crises. Bail out the people!
Sue Evans
Memphis, TN.
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jamesbond007 (1 comments) Reply:
October 14th, 2008 at 11:59 am
nice job I have been saying this
except mine a little more rad i say
let these bad mortgage holders like you
say write or set off to their own t bond
that we know is out there then the bank gets
a book entry closed over !!
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I find it ironic that one of the companies that helped people get these flimsy mortgages, now wants everyone to get a sensible mortgage. Wonder where they will be getting the sensible mortgage from? Maybe we should allow the bank to foreclose on all these homes and people might be forced to move into the city of Detroit and fix up those properties and prop up that failing infrastucture. You know, move into a house you can afford instead of one you want. The banks, builders and mortgage companies all went down the path of “Buy the McMansion, you deserve it”, now everyone is wringing their hands wondering how to fix the mess. Here’s how you fix it, pay your bills, save your money and if you cant afford the home you are living in, move into one you can. There are plenty out there now. Maybe if we consolidated the wealth and power in this area instead of continuing to try and flee this area it might be a better place to live with more opportunity. But what do I know I put 20% down and took out a 30 year mortgage on a house that is worth 40K less than it was 5 years ago.
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TOTALLY Disagree!! The “homeowners” who are now in houses own nothing. They have ZERO equity, and chose to have ZERO equity on most of the mortgages they initiated. I know there are some exceptions, but they decided to gimmick the system. I will be happy to have the people living in these houses pay rent to “us”, but to reward their past behavior is crazy. So the solution is simple - but not as described in this article. The solution is keeping these people in “our” homes, and them paying rent to “us”. “We”, hopefully, can then sell these houses when things stabilize. Think about it!!
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At first glance, this looks like a very sound proposal. I haven’t checked your math yet.
There are, however, some implicit (or explicit) rewards for risk-taking behavior left in there. Those in the riskiest tranches of the securities get subsidized for their risk, turning gamblers who should be losers into big winners. If we’re using this plan, we need to tax their capital gains back to the yield of the less risky tranches.
Second, we’re helping out the most risk-taking and stupid borrowers. People who made wise choices and are paying their mortgages are watching the gamblers get subsidized for their losses. In order to punish the bad behavior, government should take an equity share in future price appreciation on the properties they refinance. This removes any reward that the defaulting borrowers may earn.
To address the faulty lending, all I can say is that a few billion dollars should be spent on some new prisons for mortgage brokers, loan officers, bank presidents, and Fannie/Freddie officials. We should be taking their houses and selling them to recoup some losses. I recommend a Joe Arpaio solution - let them serve their prison terms living in a tent or in a refrigerator box out in the desert for about 5 years.
Most importantly, no “fix” is complete without stopping the cause. We need to end, once and for all, the government intervention in the housing market. Affordable Housing programs, CRA, and mortgage interest deductions have got to be tossed out. If we keep interest deductions, they should never be allowed for any home beyond your primary residence. We’ve got to end speculation in investment properties. In San Francisco, 60% of houses are RENTED. No one can afford to buy a home because the wealthy have scarfed up most of the houses. They are also turning houses into multi-unit apartments and condos which increases population density, traffic, and parking problems.
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RWL Cleveland (1 comments) Reply:
October 17th, 2008 at 4:19 am
Robert,
One thing I learned as a kid in Cleveland. One does not to put these thiefs in the same compound. The prison ends up being a boot camp for young white collar wannabes. or graduate school for the average mortgage broker.
“Only in rehab does one find their best connection.”
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In 1999 we got a $50,000.00 FHA backed mortgage @ 8%.Went through 5 mortgage companies to get this. First 4 wanted us to get $80,000 to $100,00 loans and put us in a bigger house than we felt we could afford. Thankfully we resisted and found a broker willing to give us what we thought we could afford. I am no financial wizard, but your plan seems to make sense to me.However,the people who directly benefit from such a plan should not receive all the benefits. Something needs to be put in the plan that recovers this subsidy as well as a reasonable return on it before the rescued buyer receives any profit from this investment.The repayment of subsidy and reasonable return should go directly to reducing our cost of this program. If program completely pays for itself, any profit would then go directly to reducing our public debt.Any remainder then appied to social security(that’s right self interest, if I have to help finance this mess there should at least be a potenial direct benefit to me).By the way the “we” is a family of 4 with AGI of $44,000 for 2007. Mom & Dad are blue collar workers with HS education. We are willing to lend a helping hand to our neighbor, but not a handout.
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My husband and I are retired. We both receive soc.sec.plus money from our retirement funds(which are now decreasing fast}. We have a housepayment which consists of a pmi insurance.Our credit rating is high ,and we have to pay this insurance in case we default on our 30 yr. loan. I think we are being punished for being conservative. I propose that mortgage borrowers be given a certain percentage of their home value to pay down their loans instead of certain institutions getting bailout money. This plan would probably cost the govt. less money,correct?
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Dear Mr. Gilbert,
Thank you for your thoughtful analysis of the home mortgage crisis.
Please consider my proposal–The Debt Reduction Settlement Act of 2008.
The Problem: Unsecured Debt on home mortgages.
The Solution: Eliminate half of the unsecured debt by an agreement between the mortgage institution, the homeowner and the federal government.
The Argument: If the mortage institution forgives half of the unsecured debt and rewrites the mortgage to the fair market value of the house, the federal government would lend the homeowner the other half of the unsecured debt so long as it is immediately paid over to the mortgage institution.
This is an equitable solution because the fault in the housing crises lies more or less equally with the lender and the borrower.
The benefit to the Citizens of the United States of America: Their children and grandchildren will not be holding the debt bag.
The benefit to the homeowner: Their mortgage payment will be greatly reduced because the principal balance will go down significantly.
The benefit to the mortgage institution: Immediate and direct infusion of cash that can be lent out.
The benefit to the federal government: The Housing Crisis will be solved right now and our government will hold a “life lien” subordinate to the mortgage institution’s lien. The “life lien” will be paid off when
the mortgagee dies or sells her house.
Very truly yours,
Douglas J. Callahan
Attorney at Law
Dated:October 11, 2008
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fred (3 comments) Reply:
October 26th, 2008 at 7:17 am
I agree with Mr. Callahan, the housing market in the Detroit area has lost will 50%-70% of its equity, according to the government’s own figures our home values are at 1996 levels and falling fast. The market will not recover in 5-6 years, 12-15 years of equity lost. If we do not bring the principal balances in line with true market value even people who put 20% down on a $300000 home could still be $150,000 underwater and most will continue to add to the declining spiral by simply deciding it just isn’t worth paying on a dead horse. Like it or not that is some of what is really happening. You can say let them lose their homes but as you do the free-fall in home values continues. All homeowners even those with paid-off mortgages are getting hammered the longer we continue to let people pay for something that is not worth the paper its printed on.
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If someone can help us Iam just looking for some bank or my own bank to refinance our house. We want to go to 30 year fixed and come out of the adjustable before our time expires. We don’t have a problem paying it, its just we don’t want to wound up like other families later on. Up until now everything was ok than my husband didn’t get paid on time we had to send in mortgatge late. In the mean time we were forced to use lots of credit cards for gas,food,clothing for the children, and help my mother in law who lives with us with her bills now that she found out she has cancer. Iam not asking no one to give us anything just help put us in an fixed rate. Off course our scores have dropped because credit cards are maxed out but where still paying our bills on time. No one will give us the time of day now since the market is going downhill. Help I don’t want to be in the streets, tell my kids they can’t continue to go to college and tell my mother in law who is suffering that she has no home to come home to after hospital. With the help of God with who we trust please help us.
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marie t (2 comments) Reply:
October 21st, 2008 at 7:53 pm
apply to your present mortage lender for a loan modificaion to get a fixed rate…get with a consumer credit co to consolidate your credit cards….you can always file bankruptcy on the cards once the home loan is straightened out…
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Most of the people in these loans are living above their means. Why is it turning status quo to reward bad behavior? The only remedy to this situation is the middle class must start growing in wealth because we have flatlined. Bottom line is we need to live below our means and concentrate on saving money instead of financing our lifestyles on credit.
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freddie (1 comments) Reply:
November 1st, 2008 at 8:48 am
i here you . we were looking for some kind of break on our morgate , which is worth half the price we paid , half! we can make the mortage payment , even if i have to work a second job . i think alot of homeowners just gave it up , hell they have nothing to lose , no money down , later! so we talked to several lenders , and to my surprise , they said the same crap , what kind of hardship are we having ? none , why , sorry we can’t help unless you missed house payments , and are unemployed , so basically your helping those with pretty much nothing to contribute , #1 very bad credit #2 and no job! how in the heck is that gonna help or solve anything besides flushing that bail out or relief funds down the gutter! i’am having a rough time paying a mortage thats never going exceed what we owe . its pretty sickening were under by half . a few homes down the sreet forclosed now forsale between 300,000.-350,000 if that! it’s sad . anyone have any advice or something that can make any sense why lenders , banks are helping those with so they say hardships when they missed 2-4 house payments and laidoff! hows that gonna work? HELP
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what about moral hazard?
who can afford what payment?
who determines who can afford what?
ever heard of socialism?
ever heard of the lost decade in Japan?
ever hear of Nouriel Roubini?
where were the calls to action when times were good?
It is foolish to think there will be no pain after the biggest credit bubble in history with loans given to anyone with a pulse…and suddenly a down housing market with tightening credit….you can give the “banks” “money” to lend…but if no one wants the money…there’s no lending…especially with all the offbalance sheet mumbojumbo….
Ron Paul is right….the FED and fractional reserve lending is the problem…
NOT INVESTMENT ADVICE
the above comments are NOT INVESTMENT ADVICE…just some thoughts on reading this “plan”
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Anon posts some provocative questions about the broader implications of the financial crisis in the US (and globally.)
If you are interested in reading more about Japan’s “Lost Decade”, economist Nouriel Roubini, or Socialism, here are some links with additional background.
We’ll let you make up your own mind whether we are going down a similar path.
Japan’s Lost Decade (also known as the “Japanese Asset Price Bubble): http://en.wikipedia.org/wiki/Japanese_asset_price_bubble
Nouriel Roubini (New York Times Profile and Interview of the New York University economics professor): http://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html?_r=2&ref=magazine&oref=slogin&oref=slogin
Socialism: http://en.wikipedia.org/wiki/Socialism
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I appreciate the thoughtfulness of the “Solution”, and agree with the thrust of it. I agree that the $700 billion TARP may be necessary to unfreeze the credit markets, but it does not solve the underlying underperforming mortgage problem. It will not stop the free-fall of home prices, which is hurting everyone in what Dan Gilbert calls the “death spiral” in the market.
In the spirit of full disclosure, I come from the Republican side of politics, especially when it come to economic issues. I hate the idea that people who gambled with other people’s money to buy a home they could not afford with the hope that it would appreciate in value and then flip it would be left off the hook. I am one of those 90% of the homeowners who did not take out a risky loan, and who is dutifully paying my loan and other bills on time. Nonetheless, I understand that banks, homeowners and struggling neighborhoods will all benefit if ways can be found to keep people in their homes at payments they can afford. Although I may not like it, I realize that I too could benefit from the Solution by not only stabilizing the housing market but more broadly by stabilizing our entire economy. Until the housing market stabilizes, the economy will not stabilize.
I perceive that the Solution may need to be improved, however. Many of the troubled properties have declined in value 25-30% (and in some locations, such as California or Florida, perhaps even 40%). If a person purchased a home for $400,000, and owes $360,000 (a 10% down payment loan) that is now worth $300,000, would he/she be interested in a rewritten loan on which he/she still owed $360,000 as in your Solution? I understand the rationale of the Solution of not lowering the loan principal owed by borrowers in trouble, because (1) that would be a red flag to people who are already pushing against rewarding irresponsible behavior and (2) this is a way to limit the cost of the proposed Solution. I fear that feature, however, would discourage sufficient homeowners from participating in the plan to achieve the objective of the Solution.
In contrast, Stephen Bancroft, the head of the new Detroit Office of Foreclosure Prevention and Response, proposes to reduce the principal in some cases, and that the government would hold a 10-year lien on properties and reap 80% of the gains if home prices rebound beyond pre-slump levels. This approach appears to be more realistic in today’s real estate markets for many homeowners in trouble. This approach, however, raises the questions of:
• In what cases would the principal be reduced? E.g., would someone who obtained a “liar loan” (by obtaining a loan fraudulently by putting false information on the mortgage application) qualify? I would hate to reward such behavior as it is a clear “moral hazard”. I realize it would require extensive checking of information of every homeowner applying for relief under the proposal which would add a great administrative burden for the program and many disputes.
• To what level would the principal be reduced? To current appraised value? Setting the appropriate rewritten principal amount is critical, and would need some oversight. With real estate appraisers having signed off on the inflated values of many of the troubled properties to enable a sale, for a fee, are we trust them to fairly appraise the value of the troubled properties now?
• If the principal is reduced, what happens to the difference between the current loan principal and the rewritten principal amount?
o Is the mortgage bank (or assignee) holding the mortgage made whole by the federal government? That seems like a bailout to the banks who made these risky loans without regard to the “5 C’s of Credit”. To do so would also balloon the cost of the program to the government.
o If not, and if the mortgage bank is forced to accept the rewritten loan with a lower principal owed, would the banks be required to participate and have the principal amounts crammed down against their will? If the program is voluntary by the banks, we then have no effective program at all, as the banks can do that now. Might there be some compromise by having some split of the loss, with the federal government taking some of the loss and the mortgage bank taking some?
o If mandatory on the part of the bankers, how would homeowners who are not in default be prevented from taking the same advantage of the program by simply beginning to miss some payments? Have only those loans in default on October 1, 2008 qualify, might be one way, but then that might seem unfair for someone who struggled to keep his/her mortgage out of default but just could no longer do so on October 2, 2008. Would this legislatively changing the contracts between two consenting parties even be legal without both parties’ consent, or illegal via a “taking a property” barred by the Constitution?
• Who would supervise this program? With the large number of mortgages needed to be modified, this would take quite an organization or set of organizations, especially if there were mortgage principal writedowns. An alternate proposal would grant a bankruptcy judge the authority to cram down the principal amount in mortgages in default in bankruptcy cases. But, do we want all of these homeowners with troubled properties to declare bankruptcy to gain the benefits of the program? I would think not, and there are not enough bankruptcy judges available to process the number anyway, especially with the slow, cumbersome bankruptcy process.
A Solution That Works may not have a broad enough effect, but adding mortgage principal writedowns does add many issues, would increase the cost and the administrative burden of the program. Am I seeing the tradeoffs correctly? If so, it seems to make sense to move forward with the Solution as proposed (or tweaked a bit through the political process) and make whatever progress we can make as quickly as possible to stabilize the housing market and the economy.
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Douglas J. Callahan (2 comments) Reply:
October 13th, 2008 at 4:18 pm
Hi Mr. Olson,
I found your observations to be sensible and practicable.
Lets put our heads together on this important issue. Scroll to the bottom of the page and then scroll up 9 to read my thoughts.
Sincerely,
Douglas J. Callahan
Attorney at Law
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John Jones, PE (1 comments) Reply:
October 17th, 2008 at 5:21 am
The government is like the mechanic who wants to replace the engine of the car when the problem is a flat tire.
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This plan makes sense. Perhaps is it proposed by a person who was involved in making the mess in the first place, but it is the first plan that makes sense to me. Handing $700 billion over to bankers seems not only irresponsible but reckless. This home loan crisis isn’t related only to people who bought houses as a primary loan but to those who refinanced their homes repeatedly related to home appreciation speculation. Unfortunately, those who saved and were responsible purchasers should not reap the fallout from this mess, nevertheless, they are going to no matter what is proposed and this idea is the first that actually seems to make sense.
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I think if the taxpayers are going to “invest” in these properties, they should share in any returns. Any profit on selling a government subsidised home should be taxable. If the market swings back and there are huge profits on the sale of “bailout” homes, taxpayers should share in it.
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4 years ago, i sent the president elect, as well as other members of congress a letter. it was concerning the rising prices of homes in florida, as well as 39 other states. i explained in a simple manner, no one making $20,000 per year can afford a house with a price tage of $300,000 and a car at $35,000, but we were doing it. all on credit. no one answered my letters, no one was interseted. markets dont fall on their own, they need help. King Solomon once said, “there is nothing new under the sun.” we live in a world that is regulated by the peracitical elite. we are the worker bees, our job untill we die is to work for the entertainment of others. we no longer work to save, since there is not enough to save. we work to eat and live–period. hear is my solution. since the market in Europe is now completely socialized, as they wanted it to be. why dont the banks simply make home payments for 100 years, after all we are in a perpetual debt. 70% of the population in the U.S. lives week by week. i dont know of anyone who can go 6 months without pay. there is no economical problem its just a way to remind people who they work for, and why they are hear. there are no problems other then the ones the congress creates in order to keep their jobs. otherwise they would have to live with reality, and get a job. all solutions will come from government, weather we like them or not. they will listen to what we have to say, but in the end do as they think. the best way to defeat a system is to comply with it, and the American public did, while our men and weman were dieing, others were building houses and making lots of money. when a nation is at war, that nations people should take care not to spend, but that was not what the banks had in mind, and perhaps the same holds true for the government.
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One problem is that there are too many housing units available-whether for sale or for rent-whether apartments or houses, for the number of people needing housing. Step 1. Stop producing new housing units. Step 2. realize that the birth rate in this country is below self reporduction–we need more immigrants to occupy the housing units.
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Ann Short (1 comments) Reply:
October 17th, 2008 at 12:18 am
Greenspan wrote in his book that the glut of unsold homes and the problems surrounding them, would not get better until the glut of overbuilt new construction homes was depleted. Suzy Ordman said every city was being overbuilt. In Michigan, many plants closed but builders flooded the market with thousands of new homes. They are still building them. Many were built with cheap illegal alien labor. This does not seem to be mentioned much in discussions about the problem. Immigrants can often not afford these homes. They may also lower the wage scale for many workers.
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Bruce (1 comments) Reply:
October 17th, 2008 at 10:18 am
I assume when you say immigrants you mean legal immigrants. The Department of Housing and Urban Development(HUD)reported that there are 5,000,000(FIVE MILLION)fraudlent loans in the hands of illegal alliens. Surely you do not suggest that these fradulent borrowers deserve to be bailed out, do you????
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We must keep in mind that economics and markets have no morality meaning that they make no judgment of “good”, “fair”, “bad” or “unfair” they simply show cause and effect on a grand scale taking in many factors we cannot control or determine until long after the fact. As a consequence it is not productive to look at the problem in those terms or try to effect a fix taking them into account.
We also must be careful to separate a fix for the current problem from what the future home financing system should be.
We have a constitutional conflict between the obligation of contract and other governmental powers. The best way to alter the obligation of contract is to use another constitutional power such as the bankruptcy power which has a long history of being superior within limits to the contractual obligation. It seems clear to me that the best way to implement the proposed fix/cure plan is through the bankruptcy court system by providing a separate chapter with the kind of standards outlined in the fix and direct the court with proper funding to deal with such petitions on an expedited basis. In my mind this is a better way of assuring fairness in administration but yet allow some equity for given family and factual situations that a complex statute and regulations alone are unable to deal with. It also avoids having to create another administrative system.
As for the future, the Danish home financing system as recently described by George Souros in a WSJ op-ed piece in the 10/10/08 edition, seems to have attributes that address many of the problems in our existing system. This should be looked at very carefully. As a society we should not have a home financing system that puts our citizens at an unreasonable economic risk. We should not have a home financial capital market system that is able to trash our home mortgage system through its excesses.
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My brother, a CPA, says: If the government intervenes to change the terms of agreements voluntarily entered into by both parties to benefit one of them then people will stop lending money. It is the certainty of contractual obligations, in part, that motivates people to lend money.
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Why not increase the mortgage deduction interest deduction to 150-200% (pehaps limit deduction to 35 or 50k & primary residence). It would immediatly increase the value of existing housing stock without any need for Gov. action or bureaucracy. Value of various MBS wouldautomatically stabilze or increase. It would also be possible to tie increase percentage to amount Gov, wants to spend i.e. maybe start at 180% with 10 point reduction per year over 8 years.
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Prior to subsidizing owners on interest rates, the market needs to adjust to market conditions. It is not neccessarily the # of homes in foreclosure or behind in payments. The country has seen 2-3% foreclosure rates before and we have survived these markets. It is the number of vacant properties within the market place. A huge overbuilding of single family homes has taken place to feed investor demand. 43% of the homes for sale in my city are currently vacant. Similar patterns run thruout the country. Investors due to the easy money that was available were willing to post losses on a specific property in anticipation of values rising. ‘0′ down purchasing leverage returning high returns were fueled by greed. My 1st solution we be to lower the depreciation rate for residential properties to staight line 10 years. Many investors would return there listed homes back to rental status because they may now break even on rents collected. Hence, less inventory. Money currently leaving the stock markets would fill another void within the marketplace making ownership of income property more advantages. This costs the taxpayer nothing in the long run. Recapture taxes on this depreciation would be returned to the government upon sale unless the property sale utilizes 1031 exchange. Interest rate adjustments should be made thru a gov’t agency based on the 10 yr T note rate fixed for the 10yr period and adjusted accordingly from there. Take out the middle man mortgage broker and his fees. The FEDS can make that loan by selling T notes and backing it thru a Fed MIP plan based on conservative principals. Supply is the key… Lower supply and the markets will stabilize on there own. Create incentives to remove property from the marketplace and into occupancy is needed prior to trying to create a Federal Floor in housing prices.
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Interesting points, but erroneously based on the theory that maintenance of home values is crucial. I would argue that you could point to many points in history where home values were 25%, 50% or 90% less than they are now, and the economy was stronger.
Economic prosperity is driven by consumer spending. If I earn $50k a year, and spend $25k on housing, I spend very little beyond the basics. Same salaries, $15k on housing, I now have a huge bump in available disposable income. Voila, up goes my spending. Lets not forget, housing is the single greatest expense in 80%+ of household budgets.
This eternal push for ever escalating profits and values comes at a cost to someone. The current crush is because that cost was paid on credit. And that credit was backed by assets that had doubled in value in a matter of years. That these assets, we discover, are not worth double means the underlying security collapses, thus the banking run of today.
But is supporting those values the answer, or will letting them fall to their natural market equilibrium benefit us all more equitably, and ultimately prove more valuable to the economy?
We have been in an up spiral for so long, people have made so many stupid decisions, and like the bailout, this idea - which makes “simpleton” sense - ultimately rewards the economically ignorant at the expense of all.
The sooner these values return to earth, the sooner people can return to spending, and the sooner we can all recover. A high cost of living is the single biggest drag on society in a global economy. It drives up the cost of everything we do, and pushes all those blue collar jobs overseas to low cost markets. I’m not suggesting we roll wages back to 1950, but lower housing values definitely decrease the demand for salaries, allowing more US jobs to remain competitive. How many of you like to speak to someone in India to get your plane tickets?
Despite what the geniuses tell you, higher home values - real or artificial - are not the answer.
And if history has taught us one indisputable thing, it is that pain teaches prudence. This, sadly, is a lesson this country desperately needs.
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The following is my proposal which has much in common with your’s. I sent it to my representatives, but don’t hold out much hope that they will do anything sensible.
The Emergency Economic Stabilization Act is failing and should be repealed. The EESA cannot restore the confidence in our economy because it is not understandable to the general public who is rightfully wary. Here is a less expensive alternative. Rather than a trickle down economic model this would wick up the flow of money and create confidence in our economy.
Bail out individual homeowners rather than large companies by establishing refundable income tax credits for qualifying homeowners. Criteria would be homeowners who purchased a principal residence within the last three years, who were honest in their loan applications, who put at least 5% down on their homes, whose equity loans, if any, were for home improvements and whose property value is now lower than their mortgage balance. The credits would be up to $5,000 per homeowner the first two years (2008 and 2009) and phase out over a three year period after that. The individual taxpayer’s credit would be computed based on the interest paid on the part of the loan which exceeds the home’s value. A greater credit could be calculated for those who were first time homebuyers (as opposed to those who got large non-taxed profits from a previous residence sale). If 5 million borrowers utilize this credit the cost would be $50 billion rather than the $700 billion projected for the EESA.
The advantages:
1. Homeowners could see almost immediate cash flow improvement by adjusting their W-2 withholding or estimated tax payments. Advanced payments could be received by homeowners for the 2008 credit utilizing funding similar in structure to the current Advanced Earned Income Credit payments.
2. Lenders would start receiving payments immediately.
3. Lenders would have an incentive to reduce loan balances to a level which would allow the homeowner the maximum credit, thereby making the loan more secure.
4. Homeowners claims for credits would be included in the forms and software used to prepare their income tax returns.
5. Homeowners claims would be made under penalty of perjury and could be audited by existing IRS examiners.
6. The reduction in the number of foreclosures will stop the irrational panic which is devaluing property.
7. Homeowners would have a strong incentive to remain in their current homes for the first two years of the plan and a gradual phase out of the tax credits over the next three years would mean there would not be a sudden glut of homes on the market again.
8. Confidence will be restored.
9. The financial markets will see a restoration of stable income flow rather than a huge taxpayer subsidized bailout.
10. Unemployment in the real estate lending field could be reduced as personnel are retrained (hopefully including ethics) to professionally determine an adjusted valuation for the homes based on sales histories and local rates of housing price inflation.
The disadvantages are that there is some potential for fraudulent claims made by taxpayers and for tax preparer schemes, however, the IRS has programs in place to handle this issue and I believe the potential for fraud on an even larger scale exists with the EESA with even higher costs to prosecute due to the newness of its program.
This suggested program is not a panacea and enacting this type of legislation requires that we accept that a certain number of foreclosures will be inevitable, e.g. where no down payment was made. However, there is a real need for market correction both in real estate and in lending practices. I believe a plan such as I’ve described above would be the quickest and least costly and would directly benefit homeowners as well as the lending industry.
As a tax professional for over 27 years and currently licensed to practice before the Internal Revenue Service, I don’t usually like the idea of social engineering via the tax code, but when the alternative is the $700 billion bailout I would approve of this far more modest and effective plan. At minimum, I would like to see such a plan incorporated into the EESA. The evidence from Wall Street these past few days indicate that the EESA alone will not restore the confidence our economy desperately needs.
–
I. Christina Garcia
Enrolled Agent
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Jeff Bahls (3 comments) Reply:
November 11th, 2008 at 6:27 pm
Interesting proposal but it seems to me that it is way too complicated for the majority of troubled home owners to (1) discover; (2) understand how it would benefit them; and (3) implementation would take quite a while. We have done way too much playing around with the tax code and the tax rates for the people most affected are very low to begin with so the pay check to pay check economic benefit would be little.
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Preserving home values is totally against the free market system. Funny how the very supporters of free markets turn to socialism when markets work against them. I think values will fall until enough people start to see reasonable value in the market place, and up till recently, no one except the brokers can dispute that prices were just too high.
The real problem will always be stagnant personal income. Fix this and no one will ever need an ARM or interest only loan. These were bad ideas 30 years ago, and they are really bad now.
I would even go further and add that commission pay methods for real estate and lenders is out of date and out of touch with the needs of society today. Just like commission sales in life insurance, it’s well past time to change the system and remove the upward pressure on the price of a home from the industry professionals, because with the current system, the fair price for any real estate is always higher than yesterday’s price because their commission check depends on it.
Fix the system, not the problems generated by it.
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Great idea, only 1 hurdle: The Obligation of Contracts clause in the Constitution. The way around this clause is bankruptcy, which is also provided for in the Constitution. Essentially, this would work if Congress passed a bill which established “Mortgage Courts” as a part of the Bankruptcy Courts, and provided for a fast-track system to rewrite home mortgages.
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What do you say to people such as myself who lost their home four years ago due to a very slick predatory lending scheme that succeeded.
We lost our home and have not yet been able to recover in 4 years.
The home was foreclosed in very dubious fast and furious circumstances.
I had $140,000 CASH Downpayment on the house.
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The economy is in turmoil and all Americans see is the wealthy getting the bailout. I see a way of fixing it and it is very easy, and will not just help a few people but everyone in the United States. We have set aside $700,000,000,000 for the bailout correct. Set aside approximately $330,000,000.00 of the $700,000,000,000.00 which would leave $699,670,000.000.00 left to feed the buzzards of Freddie, Fannie, AIG and so on. Take the $330,000,000.00 and send it to every man and woman legally in the United States and have not committed a felony, right at a million dollars a person even the children. Make the parents the executor of the children’s money and make it mandatory that all be invested for their futures once eighteen they are then able to touch the money but only if they attend a higher education program, if not they have to wait till age 24 when they may have some kind of career going at that time. Takes care of federal or personal educational loans, covered. The adults have to pay taxes first on the million at the 32% rate, which would automatically send approx. $ 69,300,000.00 back to the federal Gov. Then they can use the money to pay off mortgages, which will help these failing banks, then pay off high interest rate credit card loans, then buy some kind of alternative fuel type car or at least a fuel efficient car. This would help with the environment and help with homeland security. Not only would it do those things but it would make sure all Americans would have money for medical insurance and should be made mandatory for the use of the money, this would help our failing hospitals from non payment of services rendered. The big thing would be the solution for Social Security for all ages. The amount of taxes paid on capital gains could go straight back into Social Security for the future generations. May God bless you and God bless our great nation the good ole USA.
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This plan has some good things in it. Makes more sense than some others. I have another idea below.
As a mortgage broker, it amazes me when people think we created this mess. I can rant forever on the problems in our industry, but most loan officers WERE really trying to help their clients.
Let me preface the following with this: My office has done over 95% FHA loans. We did very few subprime loans, because in most cases they were not needed.
For those of you that think everyone who did a subprime ARM were “dumb” or “stupid”. Some of these people who used this product HAD a plan. They may not have had the best credit and they KNEW they were going to have it fixed within a few years. How were they to guess the home’s value was going to fall below what they owed making it impossible to refinance, when they now have the credit and income to indeed do so? The number ONE denial reason right now is EQUITY position, not credit, not income. If someone is upside down, there is nothing we can do. For those of you who live in a perfect life bubble, congrats, but life is not always so easy for everyone.
Another Possible solution to the housing problem is two pronged. 1- We would be using HUD/FHA to allow ALL rate and term refinances as long as the borrower debt ratios with the new payment OR has paid their previous 12 payments on time (this shows ability to pay and if their payment is going down, why would they stop? This would help the self employed borrowers). IF the LTV is greater than 110% HUD could collect an extra one point of upfront MI and .5% more PMI annually. MOST people WANT to pay their home loan. Do some math: $100,000 loan amount, this is $2500 in upfront MIP and then $1000 annually. That is $3500 first year per borrower. If 1 of 10 default, that means they collect $35,000. If this one foreclosure on the $100k home lost $35,000, then HUD would break even on a 10% default ratio (I do not have HUD’s overall default ratio, but I am guessing it is significantly lower than this)!! And this doesn’t count the PMI annually in years 2 thru when the PMI falls off (when borrower reaches 78% LTV), we can even have the monthly PMI go down to normal after year 3. Also we could even put in a reward, say the borrower pays the first 36 payments on time, no late’s, they get some of there upfront MIP refunded, this is even more incentive to be on time.
Part 2- We need MORE buyers, not less. We need FHA to go to a zero down program. As most know they eliminated seller funded down payment assistance and for the most part it WAS a SHAM, but it helped people buy a home. Some people very deserving of a home can not save enough. I wrote a blog post on this here: http://blog.fhainfocenter.com/2008/07/fha-why-raising-down-payment-to-35-and.html
How much would this cost the bailout plan? Maybe nothing, remember it is the borrower who is going to pay extra PMI, to get that low fixed rate…if the default rate was way over 10% and or the loss per default was outrageous, then we MIGHT have to tap into the $700 billion, but I am guessing it would be significantly less than $50 billion even
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bella zedlav (1 comments) Reply:
October 23rd, 2008 at 1:01 pm
I have talked with some realtors and mortgage brokers and yes they have said that basically it all amounts to GREED from top to bottom (and if we continue to deny our responsability in our part it will continue to repeat in the future) Lenders at times knew the borrowers were not qualified, borrowers at time knew by basic math they could not afford the house they sooo much wnated maybe they could afford something less expensive but because of certain mortgage plans they ignored the basic math and personal resposability and wenrt along with the plan presented by the realtor who just wanted to make a sale at any cost and the mortgage who wanted to make it happen at any cost. A SOLUTION TAHT WORKS MAKES A LOT OF SENSE in that people will be helped but not at the full expense of those who were responsible enough to observe that basic math and know what they coul afford and not be blinded by greed!!
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Jeff Bahls (3 comments) Reply:
November 11th, 2008 at 6:33 pm
You got advice from the very people who helped cause the problem and also benefited from all the transactions. It is easy to point to the person with the mortgage problem and and wag your finger at them to show poor behavior but I would suggest that they were just doing what comes naturally with an unrestrained capitalistic lending and appraisal system.
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The 30 yr mortgage is front loaded with interest to the point the borrower becomes an indentured servant to the lender.
To reflate housing prices and move vacant properties the buyer needs the interest charge to be applied to the principal for the first five years. A bad deal for the lender but it does return capital.
The buyer builds equity.
This can justify paying the inflated prices.
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Dimtirios Gikas (1 comments) Reply:
October 29th, 2008 at 4:18 pm
A 30 year mortgage is NOT front loaded with interest. Do you pay more interest in year one than year 10? YES…but that is because you owe the bank MORE money in year one than in year 10. I am tired of some of the “experts” talking about how you pay more interest at the beginning…you pay the same rate of interest the entire loan, you just owe less as you go along, thus you pay less interest in dollars.
It is insane the lack of education and knowledge in our country.
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Angie (1 comments) Reply:
December 17th, 2008 at 6:20 pm
Not really sure what you mean…? An amortized mortgage is front loaded, which means you pay 95% interest the first several years. Only a fraction of what you pay goes toward principal. For instance, on a $100k mortgage at 6%, your payment each month will be around $600.00. At the end of 10 years you’ve paid $60,592.00 in interest. But, your principal balance has only been reduced from $100k to $81,451. That’s only $18,549.00 goes toward the principal. In year 11-20 you pay another $43,000 in interest but your principal has been reduced alot more to $45,623.00 which means in year 11-20 you’ve reduced your balance by $35,828. Twice as much money that you pay monthly goes toward your principal after the first 10 years. And since I amortized this as a 30 year note you can see that in the final 10 years. You are paying $45,623.00 toward the principal with very little going to interest. Please explain what you meant by “A 30 yr note is not front loaded”??
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The government is going to end up with allot of defaulted morgages we need to keep these Give banks a certain percentage on the dollar the best homes in very good conition 80% on the dollar these should be sold to returning veterans. If the government guarinteed 30% of the new loan a bank could not loose. The next level of morgages home that are salvageable pay 50% . Aprogram for seniors called green thumb could be used to repair maintain this properties until a price rebound occurs, The last group like some in my area leaky roofs mold realy have no value these eyesores pay 20% on the dollar tear them down please! A little about green thumb we all no our seniors have been hard hit and need a boost many have a lot of talents we can use. (3/21/98 Baltimore AFRO-American Newspaper)
Putting Maryland’s Seniors Back to Work
by Congressman Elijah E. Cummings
Last week, I met with a lovely lady by the name of Mildred Kelly. Ms. Kelly had recently embarked on the path to self-sufficiency by rejoining the workforce after raising six children and battling medical problems that kept her from working.
Ms. Kelly told me that at the age of 65, she found herself in need of a supplemental income. She was barely surviving on government assistance and strongly desired an opportunity to return to the workforce. That’s when Maryland’s Office on Aging recommended Ms. Kelly to Green Thumb, a national non-profit corporation whose goal is to strengthen families and communities by providing older individuals with opportunities to learn, work and serve in their communities.
Through Green Thumb’s Senior Community Service Employment Program, Ms. Kelly received three years of employment training, including computer skills, and was offered a permanent position with Baltimore’s Senior Housing Initiative in November 1997. In honor of her accomplishments, Ms. Kelly has received Green Thumb’s Prime Time Award, which is given to the most outstanding older worker from each state. Ms. Kelly was chosen because of her many contributions to her community.
Green Thumb, which is headquartered in Arlington, Virginia, has successfully run its senior program in 11 Maryland counties, including Baltimore City, since 1978. It also has been active in 45 other states, including Puerto Rico, since 1965. Funded primarily by the United States Department of Labor, Green Thumb helps more than 26,000 older Americans each year find gainful employment. In fact, 285 senior citizens of Maryland, including Ms. Kelly, were assisted in finding employment with over 115 municipal and non-profit agencies between July 1996 and June 1997.
During that period, wages paid to these workers totaled $801,060. Of that amount, 27 Green Thumb recipients, averaging $3,807 a year on welfare, were able to decrease their government assistance by 93 percent.
Green Thumb is able to boast such figures because it provides program participants with literacy assessments, job and work readiness skills training, employment development and placement, mentorships, and job retention support.
Green Thumb utilizes innovative, customer-focused solutions to the problems facing our seniors today. The organization applies a “work first” strategy that focuses on an integrated approach tailored to meet the needs of each participant; it builds self-esteem and employability through enhanced education, training, and support services. It also requires active involvement of the business community.
Ii am not heartless I do belive in trying to keep people in yhere homes bot where i live so many are abbanded wow sonething has do be done with these propertys if the taxpayer is going to own them they must be maintain others can be torn down the homes have been negleted and are unredeemable we need to sell homes the fed can chose to maintain many with these off the macket a rebound may begin in my area develpers simply over built causing a glut more homes than people i dan see no easy anwer allow seniors to make a little extra they are surrery greatly hold a portion of homes in trserve and maintain them would help end the glut the fed than can start selling whene the market rebounds supply and demand will work housing values reinflat banks assets increase as proerty values rise for some i do not think any bailout or refinance will help they were sold houses they have no way of paying for others we can help make up payments and tack on the end of there loan for the others who did not take out fixed rate loans i belive they could not ever pay off the home the banks that made these very risky loans can not be allowed to profit from them
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This concept of stabilizing housing prices by keeping existing occupiers in their homes is fundamentally flawed.
Price is determined by supply and effective demand, that is demand from people who can afford to buy. Present prices were determined by buyers using Monopoly money called sub-prime loans. Once this artificial demand is withdrawn prices must fall to a sustainable level. Even if financial arrangements are made to keep existing owners in their homes this will not sustain the resale values as new buyers will not have access to Monopoly money.
Since middle class incomes have not risen much in the past eight years, effective demand cannot have changed much. Therefore housing prices cannot remain much above where they were eight years ago.
We need a solution that lets them fall.
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Jay (1 comments) Reply:
October 26th, 2008 at 10:08 am
Your argument is fundamentally flawed.
Take a look at “July 2008 Sample Loan Performance Date” published by Federal Reserve and you will see that in the Subprime category that 77% of Fixed rate and 47% of Adjustable rate Subprime loans were current. Now last time I checked it took real money and not “Monopoly” money to keep a loan current…
The large difference between the payment rates of fixed verses adjustable rate Subprime loans strongly suggests that the higher interest rate of the Adjustable rate products (once they shift up) is a primary factor causing delinquent payment and eventual foreclosure. Since the “A Solution That Works” plan directly attacks this root cause of the problem by adjusting interest rates to a market level, it should yield sustainable payments which will benefit both the borrower and the financial institution(s) holding the loan. Modified performing loans are almost always more valuable than nonperforming loans!
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I think your solution can do a lot of good. I would like to offer a suggest of an additional proposal to help with the current foreclosed homes that are also affecting property values.
The government believes the lack of capital these foreclosures create is our biggest challenge. My suggestion is for the Federal Government to offer to purchase any and all “bad debt” for a set percentage of the initial loan. This needs to be a uniform percentage, something like 60% of the initial note. Obviously banks will take a bath on this, but they will retrieve some capital (to loan again) and learn from their mistakes. I believe the policy of the government should be to hold and maintain this property until the initial purchase price can be achieved again. This will (albeit artificially) cause the current home values to begin to increase, which helps people stop becoming backward on these loans.
I realize the cost of holding and maintaining these properties will be great, but the Fed is talking about doing something similar to this (but they are being cryptic in who is going to get these properties and at what kind of deal). I don’t want to see Washington insiders benefit at tax payer expense.
I tried to keep this concept relatively brief, but am happy to further discuss if there is interest.
Thanks for trying to help guys!
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kiee1 (4 comments) Reply:
October 25th, 2008 at 12:39 am
I agree with you comments we as tax payers must recieve a partial return on this money we have given banks we need to put 50% of property we will own in reserve hold it keep it off yhe market to recieve a return on the bailout , I think the greenthumb program is a response to look at seniors have taken a hard hit if we can pay a wage of 2TO3 dollars an hour to many very skilled workers keep them off food stamps it would equal out and allow many seniors that are of a proud generation feel better about themselves I also belive the eyesores the bottom 20% of homes need to go I want them torn down! as the glut of homes is reduced the free market will set a fair value on property all will benifit in the end
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this is good solution …the one I though was going to happen but it looks like we are going to be struggling for some time yet.. my house has been for sale for 8 months now each month my house is worth less…I owe 70, 000more now than i can sell for….If I had another house to go to I would walk out…
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I have shared this outline, along with updated cover pages since before the TARP vote. Cats and politicians both handle their crap the same way, they cover it up. We need to keep pushing them to address the underlying issues. Reckless, politically self-serving, decisions about banking & finance
regulations led us to this point; reckless, politically self-serving, spending will not remove the problem.
a MEND THE T.A.R.P.
Trouble Asset Relief Program
or
(Taxpayer Assault & Robbery Plan)
It’s time to change the “Bailout package for Wall Street” into a recovery package for Main Street. We, you and I, have to demand that those in Congress who, “regret … not doing more to stop (the) economic crisis”, do not escape with a mea culpa; along with members of Congress who showed the courage to call for regulation and say no to the Troubled Asset Relief Program (TARP), they need to pass aMendments to create a Taxpayer Assistance & Recovery Plan.
In his October 13 USA Today article Ken Dilanian says, “Both parties in Congress played important roles in setting the stage for the ongoing financial meltdown… Congress chose not to impose barriers that economists widely agree could have helped stave off the crisis that continues, even after lawmakers approved a …Bailout package for Wall Street.” He goes on to say that many in Congress “regret … not doing more to stop (the) economic crisis”.
Long before the collapse of Lehman Brothers, the government ‘loan’ to AIG and the day Treasury Secretary Hank Paulson looked into a camera and asked taxpayers for $700 billion, a plethora of independent economists, government administrators and elected representatives repeatedly tried to deliver a warning that the apparent housing ‘tide’ lifting the economy was the beginning ripple of a gigantic tsunami.
The argument was based on a package of events: Congress’s overwhelming passage of a bill in 2000 barring most regulation of derivative trading; a pitifully regulated mortgage lending environment that encouraged abuse (Can you say, ‘no documentation adjustable-rate loans’?); public acceptance of housing fueled economic growth without asking, “Where is the income to pay the mortgage?”; Congress’s rejection of a 2005 bill aimed at restricting Fannie Mae and Fredie Mac investment in high risk securities; and the Wall Street version of self regulation—packaging a complex set of proprietary high risk bonds and lowering their lending standards to get increasingly higher rates. The sole value of these securities (estimated at somewhat more than $530 Trillion) was a bet, often with borrowed money, on continued appreciation of the underlying real estate.
So far the Plan (TARP) has avoided dealing directly with the underlying issues, supporting house prices and reducing foreclosures, that precipitated the ‘clog’ in the financial system. Even the latest decision to buy non-voting bank equity with the first $250 billion is still, to use a fire fighting analogy, targeting the smoke instead of the base of the fire; and as long as the Troubled Asset Relief Program allows the purchase of ‘toxic’ securities, such as Structured Investment Vehicles (SIVs) and Collateral Debt Obligations (CDOs), it could be more accurately titled the Taxpayer Assault & Robbery Plan.
T.A.R.P. a MEND ments
for a
(Taxpayer Assistance & Recovery Plan)
1. Buy the underlying properties at not more than current market value. (Secy. Paulson says the entities holding the mortgages may not be willing to sell at a reduced value and take a further write down; but the properties can be taken by eminent domain if necessary. Adjust the capitalization requirements relating to these properties.)
2. Leave the mortgages with the current holders to service, at the initial mortgage value, and require recalculation of the mortgage amortization term/rate to avoid foreclosure.
3. Leave homeowners in the properties, at the initial mortgage value, and set a new fixed amortization term/rate, based on income/ability to pay. (Possibly less than but not more than current fixed market rates; include strict guidelines for relief of the debt, and possibly require a debt management plan)
4. The sooner of, ten years or when properties are sold, taxpayer money is returned—through sale or refinance of the property.
5. The sooner of, sixty days or thirty days, require the U.S. House and Senate to have drafted and passed new regulations governing the mortgage and investment industries to avoid a remake of this play.
6. Restrict payment from the fund to the owners of whole loans. Disqualify payment to investors for indirect exposure through mortgage backed securities such as Structured Investment Vehicles (SIVs) and Collateral Debt Obligations (CDOs) from any participation.
7. Restrict executive compensation in any way related to bailout funding for the duration of taxpayer involvement.
Unclogging the financial system and getting a return of, and on, our money are not mutually exclusive. This plan puts immediate money into the banking system, holds the players accountable (somewhat) and follows a sound mortgage banking principal for the taxpayers’ (our) money—Return OF the investment is more important than a return ON the investment.
‘CLOG’ the e-mail boxes and phone lines of your representatives—TODAY
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kiee1@chartert.net (2 comments) Reply:
October 25th, 2008 at 2:35 am
OR ALL US VOTERS. AS WE WATCH THE DEATE TONIGHT WE NEED TO ASK OURSELVES ALL THE TAX CUT PROPOSALS THE NUGE DEBT ADDING MORE DEPT BOTH WILL SPEAK TAX CUTS ARE WE AMERICANS BECOME SO GREEDY DO WE REALY BELIVE WE CAN CUT TAXES INCREASE SPENDING FIGHT A WAR ? SEEMS NO ONE WANTS TO PAY ALL BELIVE THEY PAY TO MUCH IN TAXES. A NEW IDEA. AS TOU WACTH SE WHO THESE CANIDATES ARE REALY WORKING FOR BOTH SUPPORTED BAILOUT BILL AUTO COMANY BAILOUT WALLSTREET BAIOUT BANK BAILOUT .NOW A PLAN TO BUY SHARES OF BANKS THERE SEEMS TO ME ONLY 4 OR 5 BANKS ARE IN DIFFACULY BAD HOME LOANS THAT IS WHAT THEY WANT US TO BELIVE THE TRUTH IS THE BIG INVESTMENT BANKS BAD LOANS ARE TO STOCK TRADERS AS THE MARKET WENT UP INVESTERS BELIVED THEY COULD NOT LOSS WHENE THE MARKET COLAPSED NO REPAYMENT WHY DO WE HAVE TO ASSUME THIS DEBT THE BANKS GAVE OUT BILLIONS. OF DOLLARS NO COLATERAL .THE TRADERS INVESTERS BROOKERS THERE PERSAL ASSETS CANT BE TOUCHED THEY WILL REMAIN VERY WEALTHY AND WE PAY THE BILL . TWO MORGAGE BANKS FDEDIE MAC FANNIE MAY HOLD THE BAD HOWE LOANS AND HAD ALLREADY BEEN BAILED OUT WITH OUT THE LAST 700 BILLION THIS BAILOUT IS REWARDING BAD BANKING SINCE RONALD REAGON THE THEAM OF OUR GOVERMENT LESS REGULATION FREE MARKETS. BUT WE HAVE LOST CONTROL OF GOVERMENT I HAVE HAD TIME TO SPEAK TO 2 RETIRED SENATORS BOTH SPOKE THE SAME THE SPECIAL INTREST ARE RUNNING OUR GOVERMENT BOTH PARTIES IF A MEMBER OF GOVERMENT REFUSES TO TAKE THE BRIBES THE CET LOW POSITIONS ON MEANINGLESS COMMITEES THEY CANNOT INTRDUCE BILLS BOTH SAID THEY WENT INTO THE U.S. SENATE WITH THE BEST INTENTIONS NEITHER BACKED BOTH CHOSE NOT TO SEEK A SECOND TERM . I WOULD KIKE THE PEOPLE TO BECOME SO ANGRY PASS PATIONS SUE IN FEDERAL COURT DEMAND RECORDS OF FREE MONEY FREE TRIPS FREE MEALS FREE HOMES AND SO MANY OTHER BRIBES . JOHN MCCAIN NET WORTH LISTED AS 28.44 MILLION THIS WAS EARNED WITH NAVY RETIREMENT AND SENATE PAY IT DOES NOT EVEN COME CLOSE WERE DID THE EXTRA MILLIONS COME FROM ? BARACK OBAMA 1.2 MILLION JOE BIDON HAS THE LOWEST NET WORTH IN SENATE MAYBE A HONEST MAN . CANT FIND GOVENOR PALINS WORTH LOOKING AT THE SENATORS WHO RELEASED IMFO IT LOOKS MOST ARE AT LEAST MULTI MILLIONARES WERE IS THIS WEALTH EARNED LOBBIEST SELLING INFLUENCE OUR GOVERMENT SEEMS IT DOES NOT HAVE TO ANWER TO THE PEOPLE ANYMORE . I FIRMLY BELIVE A CLASSACTION LAWSUIT BE FILED AND MEMBERS OF THE HOUSE AND SENATE ACCOUNT HOW THEY BEBAME SO WEALTHY THE GUITY I BELIVE TO BE MAYBE AROUND 80% SHOULD BE POSACUTED AND THERE ASSETS SIEZED ALL LOBBIEST NEED TO BE FORCED TO REVEAL WHO THEY BRIBED AND THER AMOUNTS THAN BE BANNED WE ELECT THESE PEOPLE TO REPRESENT US THE PEOPLE NOT ANY OF THE HUNDREDS OF LOBIEST PUT THEM IN JAIL NO MORE HAVING TO BRIBE YOUR SENATOR TO BE LISTENED TO . TONITE LISTEN TO THE PLANS OBAMA ACORN TRAIL LAWYERS TEACHERS UNIONS ALL UNIONS GOVERMENT UNIONS BANKS A TOTAL SELL OUT TO MILITARY CONTRCTORS AS HE WILL CONTINUE THE WAR MCCAIN AARP BIG BUSSNESS THE SUPER RICH MILITARY CATRACTORS OIL COMPANYS CHINA WHO BUYS MOST OF OUR DEBT I CAN THINK OF MANY MORE WHO PAY OFF BOTH CANIDATES . YHE CANIDATES SAY THEY WANT ACCOIUNTABILITY IN THIS BAIL OUT BUT I DO NOT BELIVE COULD STAND IT FOR THEMSELVES, IDEA FOR OUR RETURNING VETERNS A HOME FOR THOSE WHO CHOSE TO BUY ONE A 30% GOVERMENT GARENTEE ON THE LOAN SELL THEM EXISTING HOMES THEY WOULD BE OFF THE MARKET THE HOMES THAT HAVE BEEN EMTY FOR A LONG TIME TEAR THEM DOWN THE BAILOUT SHOULD NOT EXCEED 30% OF THE BAD LOAN THS COVERMENT COULD HOLD THE EMTY LOTS TO SELL WHENE VALUE BEBOUNDS TAKING THESE HOME OFF THE MARKET WOULD CUT BACK ON THE GLUT OF EXTRA HOMES NEXT ENERGY IF A PERSON LOOKS AT THIS DESASTER LOOK AT OIL A PRICES ROSE THE ECONEMY SLIPED HIGHER OIL HIGHER FOOD PRICES LESS MONEY FOR FAMILYS AREADY STUGGLING SINCE IF YOU DONT WORK FOR THE GOVERMENT OUR WAGES HAVE DECLINES FOR 20 YEARS THE REDISTABUTION OF WEALTH IS NEARLY COMPLETE THE GOUL 80% OF WEATH IN THE HANDS OF 5% THE 5% DONT BELIVE THEY SHOULD PAY TAXES BECOUSE THEY CREATE JOBS , JOBS WITHOUT BENIFITS LOW WAGES THE POWER IN THIS NATION SHOUD COME FROM US GIVING THESE PEOPLE POWER I DO NOT THINK THE GOVERNENT HAS REPRESENTED ME FOR YEARS AND EVERY ELECTION WE LOSE MORE RIGHTS AS YOOU LISTEN WILL EITHER CANIDATE SAY THEY WANT TO EMPOWER US . OR JUST EMPOMER SPECIAL INTREST PORK THE WASTE IS SO INCREDABE HOW MUCH LONGER WILL WE ALLOWS THESE CRIMINALS TO GOVERN I VOTE EVERY ELECTION HAVE HOPE CHANGE WILL COME THIS YEAR THE SAME OLD WE DONT HAVE CHOICES ONLY CHOOSE THE CANIDATE THAT WILL DO THE LWAST DAMAGE TO FINNISH ALL US TAXPAYERS NOW EACH OWE 48800 ON DEBT SURLY TO RISE WE NEED THE 80% OF OUR CONGRESS ARRESTED FOR TAKING BRIBES SELLING US OUT GET RID OF LOBBIEST ARREST THE GUILTY THEY ALL HAVE A LOT TO AWNER FOR I CAN NOT ACCECT A GOVERMENT THAT IS NO LONGER FOR THE PEOPLE OR BY THE PEOPLE BUT CAN AGREE ON GREED THANK TOU KIEE1@CHARTER.NET
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this is interesting send to your congressmen and senator
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The cause of all this mess is people living beyond their means. Simple as that. And those who are crying about how they will end up on the streets, I just want to ask you what you thought you were doing? You must have realized you were gambling with all your money. Really you must have. And a gamble is a gamble. So be quiet, file for bankruptcy, and go move into an apartment and start over. Guess what? I make 30 grand a year, college educated, and I don’t own a home. I can’t afford one yet, and I accept this. Yet your selfish actions are punishing all of us. And the solution here is to reward you! You want to know what my solution is? Let people pay for their mistakes. This country deserves what is coming.
Also the answer is not socialism, the answer is never socialism. If you want everyone to be ‘equal’ then just go away. I work harder than some and less than others, and no one is equal to me. This is America, deal with it or get out.
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Dana (1 comments) Reply:
October 24th, 2008 at 9:42 pm
You can’t say that it’s people living beyond their means. How do you know that? File bankruptcy and start over? It’s not that easy, you obviously have no clue about bankruptcy and the change in those laws. Things happen that change your financial situation (like losing your job due to changes in legislation). You were not living beyond your means but now had to take a lower paying job and are still trying to make it. How can you judge everyone when you don’t know their individual circumstances. College educated does not make you as smart as you think….it seems to make you think you are better than others. Someday when you feel you are financial stable and you go out and buy that house, I sure hope nothing happens (out of your control) that prevents you from maintaining it. Boy, you would have to EAT YOUR WORDS!
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not everyone is abusing the housing bubble. we have a arm & our lender says that in a year we could get a 30 yr. fixed, bur our lender went bankrupt and sold it to a servicer. my son had lost his job for 5 months. we do not live beyond our means, so everyone has a different situation they are in that they cannot control. our house is 225,000 & now it’s worth$140-170,000.no equity now! we need help for these people now.we are not trying to get something for nothing. it’s the servicers, investors & government, there were no regulations put on these loans, they made to easy to get. that is everyone american dream to have a house for your family, can you blame these people for wanting a house ? a lot of people i know including us, we made just fine until prices went up on everything and my son lost his job.
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You have to be kidding me. Providing assistance to homeowners who have overextended themselves by participating in the largest fraud scheme the US has ever seen is insanity. Tax payers should not have to bail out such irresponsible behavior. Further, creating an artificial floor on housing at the cost of tax payers is a recipe for disaster. This will create a disincentive for homeowners to make their mortgage payments and eliminates the sanctity of the contract. Let the market correct on its own. When prices fall to affordable levels, buyers will return. I can guarantee you however, new buyers will not return if they feel that existing homeowners are receiving subsidies that they are paying for and not receiving themselves. If you want to see an example of this socialist type of policy works, just look at Russia.
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This is a good idea, but has a few problems.
People couldn’t afford the outrageous prices on homes–that’s why they succumbed to “creative financing” in the first place. They won’t be able to afford the payment on a 30 yr mortgage. Why not stretch them out to 40-50 years if necessary?
To prevent resentment and backlash from citizens who have been living within their means, and paying their bills responsibly, the government should get a share or lien on the property when a homeowner gets this mortgage assistance. This would be repaid when the property is sold, added to the mortgage at the end, or paid off by reducing the mortgage interest deduction on their taxes over the years.
And it needs to happen NOW if it’s going to do any good at all.
Our finance and government leaders ignored this growing crisis. They didn’t care until it affected them. We should vote them all out of office, and put some of them in jail.
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sally carder (2 comments) Reply:
October 24th, 2008 at 11:46 am
I think everyones situation is going to be different, but it all boils down to the lenders writing loans that people could not afford. Every case has to be looked at, but in general it was greed and baqnks are getting all the help. There shouldn’t be a backlash from homeowners who financed with a fixed loan, I don’t think the Government is going to post the people that were taken by predatory lenders in the newspaper. Everyone makes a mistake and alot of people are suffering for it, so we need to come up with a plan to fit the individual problem, it can be done the same way they got into, with a up front lender going case by case.
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I think the government should go ahead and purchase 80% stakes in all of these financial firms and banks and hold the shares for two or three years. place new CEOs in the firms that were managed the worst with new qualified peoples. Then with the new monies these institutions receive from our investments they continue normal business with new regulations from the government while we are invested in them.
Then the government should take over all the foreclosed properties we own and raffle them off to the public with tickets priced no more than $100 dollars until the appraised value of the house is met. Like a lottery instead of winning a million dollars you have a chance to win a home as long as you can afford the property taxes.(THIS WILL GENERATE LOTS OF CASH PROFIT THAT CAN BE USED TO BETTER OUR COMMUNITIES AND LIFESTYLES) (((WILL GENERATE WEALTH)))
Then for people who are facing foreclosure help them refinance loans to where they can afford to pay for their homes. Many people are losing homes for many reasons. Not only because they bought a home that was to expensive for them. Remember many people are losing jobs.Living Expenses and energy expenses are taking large chunks out of family budgets. Higher interest rates mean less money to live on. Many people live paycheck to paycheck. This is a fact not a fantasy. For those who can afford and who are in good standing give them some interest rate relief on their mortgages. Then once the stock market rebounds sell the financial stocks back to the public and take the profits and pay off some of the debt. (((WILL PROVIDE STIMULUS TO FAMILIES. )))
The new economy to get us out of this mess is ENERGY. If we could lower the cost of using electricity or if we could get around in a vehicle without paying for gas that’s more money in our pockets to spend on consumer products to drive the economy than any tax cut could provide. Alternative energies offer this for us. We spend 700 billion a year on oil alone. LIVING EXPENSES are draining all of our pockets.(((IT WILL GENERATE JOBS.)))
If preventive health care was resonable for us to attain and if we all had access to preventive health care than thats less money it takes for us to live.It would lower sickness and chronic dieseases. The public as a whole will become more educated on how to take care of ourselves. We need access to preventive health care. Thats cheaper to provide universally and would lower health care insurance as we would all be less of a risk to insure because we all would have access to preventive health care.The gov’t could work thourgh the REd Cross and County Hospitals to do this. They could provide corporations who donate a $1.50 tax break for every $1 dollar donated to the REd Cross and County Hospitals and other charities that work with the governmet to proved universal preventive health care. f the gov’t put large amounts of money toward these measures the health care system would feel a tremendous less strain on it than as it does now.
Create jobs by focusing on the infrastructure of this country. Natural disaster destruction, failing bridges damns and levees, traffic jams, high tolls, bad rolls cause us all to loose money. From wasted gas while stuck in traffic to car repairs from pot holes. These things need to be addressed. They will create jobs.
Most Importantly of all we have to provide great education for every American. If we want to make America its strongest then we all need to want us all to succeed and to have the skills to succeed..
This is all the gov’t needs to do. We would all come out better off. And America’s economy will once again Shine.
LOVE YOUR FELLOW AMERICAN no matter if their your family friends neighbor or fellow stranger. We are all a stranger to someone.
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I like the plan, but I like the one where the fellow suggests we give everyone a million of the bailout too. It wouldn’t go far to paying off the tax debt of every person in the US. Divide 700 billion by the population. Now divide the rest of the federal deficit.
A corporation is a profit-making machine. It’s the most successful invention of humanity. The problems are, there’s no off switch and regulation falls off at borders. We’re facing the reality of ‘a thing can’t have ethics’ and people work for the thing, the thing doesn’t work for the people. My father, the most highly awarded IRS employee ever, said, “The biggest mistake we ever made was making a corporation a legal person for simplification of taxes.” He saw this coming, forty or more years ago.
The ‘bailout’ plan has already been changed. Now it’s ‘buy the paper.’ The one’s we’re ‘helping’ are making plans to use the money to buy-up competitors. It’s the profitable thing to do.
When the ‘measure’ of a person’s value to society begins with ‘net worth,’ it’s not healthy. Ask a teacher what lack of respect, due to low pay, does. The financial crisis is just a symptom.
I’m a ’successful’ science fiction writer. I don’t make much either, but I paid cash for a not-great house. I have a well and a windmill and my car runs on water. It’ll wear out in a few years and I’ll convert another to run on water. Kits are available on the net. Oh, and I don’t have any credit cards. You figure out what I see coming.
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First, I am a former Real Estate Broker with 15 years of residental sales (until 1999 when I became medically disabled)who cannot believe the lenghts that lenders and greedy homeowner have damaged the complete system. (Home buyers have multiple points of disclosure at the time of mortgage application and even at the loan closing that states the full cost of the loan and all terms. I cannot feel sorry for the ones that bought over their ability to pay on adjustable rate loans. Where where the watch dogs for the system. There is plenty of blame to spread from the loan originators, real estate agents, appraisers, and anyone recieving a fee, commission, or any others form of compensation. Now, for main reason for this commentary. I want to make my voise heard and ask for consideration for other people caught in uncontrollable substance. My example, I am diabled and we live on a set income from my husband’s employment (his employer has announce no considreation will be given to employee raises for the next 18 months)and my social security disability. My medical costs have effected our credit which will not allow us to refinance our current 7.0% fixed rate loan. But, if we could receive a reduction like the people who had the adjustable reate loans, we could relieve our threat of foreclosure. We have 45,000 equity and a 80,000 balance. We could refinace only the outstanding at the new suggested rate and have a much lower monthly note. I feel that there should not be a open policy for the bailout but it should consider that others have a legitimate reason or need to have the same options!!!!!!!!!
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Under no circumstances should the irresponsible be offered lowered fixed interest rates than what people with 800+ FICO scores got with 15 year mortgages.
Also, any bailout should have penalties attached for people accepting such a deal including: 1) significant tax attached to any profit upon home sale, 2) no future home equity loans permitted 3) no future ability to purchase a home with less than 20% down. Also apply similar/stiffer future restrictions for anybody finding it convenient to walk away from their mortgages.
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I do agre with all oue the governebt is the worst land lord. aslo we are going to be stuck eith akk this bad debt. as a reasonable reply i I must say to just abandon properteis as in the past only drives down our properity values. http://en.wikipedia.org/wiki/Rockerville%2C_South_Dakota. I lived there whene the US goverment took it over .In the savings and loan crash . No federal agency came to look at it did not maintain taxpayer intrest I was living there an auction of just the antiques alone would have regained 800 thousand I never recieved a reply for the feds I mowed put plywood over windows to try to prevent theft no one from the Goverment ever came to look at the property for five tears whene I left I look at websites it is still for sdale roofs caved in no maintanance a lose to tax payers of 3 to 4 million how will the U.S. goverment maintain the homes we will own now. simply abandon them I see it in my neighborhood already .No upkeeep wont mow lawn allow leaky roofs mold . Do belive the green thumb project can save some homes by paying skilled seniors a small wage. the seniors have taken a great hit on this desator Green thumb is a idea to maintain properteys repair also help the hardest hit keep the homes off the market to a rebound we will recover our taxpayer money tear down the bottem 20% we all see the homes that need to go the taxpayers will still own the land at some point will recover our loses . to put our property on the commodites market we will recieve 10% of value In other words our total bail out witch is realy around 1and1/2 trillion we the tax payers will recieve a negitve 90% retun .We must demand a plan that will at least return us a 80% repayment. plus with green thumb we can target a group of skilled people who need help now . put to work is better than paying food stamps. the generation we will target has never wanted a handout but a helping hand they would be proud to be considered a asset not a liability
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At first glance I thought your proposed plan might work out to solve the current hoousing crisis, but after reading it thoroughly I have concluded it will not do much to put a base in housing prices and will not work. I believe it would have minimum impact on putting a floor in housing prices. Your plan is not much different from the current gov plan except it would be mandatory vice the current voluntary approach for lenders. But the big down fall of your plan is its concentration on helping people with ARM loans. Fixing ARMS needs to be done, but that will not bring housing prices back to a normal level.
What we need is a program that requires homes to be refinanced at current market value. This is the only way a floor can be established to stop declining prices. We need a plan thats inclusive, poor man, middle class, or rich no matter your status you should be eligible to particpate if desire to. If we don’t do this we will soon see a repeat of what happened during the great depression when even those that could repay a loan did not and simply walked away from homes because of declining values. You alude to this potential problem in the first part of your article, but exclude a solution. Already many people are doing the math, and are looking at the time frame that may be required to recoup 40 to 50 percent of their home values that has been lost. Once they do the math many of these folks are simply walking away from the home, not because they cannot pay the mortgage, but because they aren’t stupid. Already in my area and parts of Nevada and Cal people who can pay are deciding not to pay and mail the keys in to the bank. Many of these people like me see bail outs and hand outs to everyone from the banks to speculators with our tax dollars, and simply figure there will not be any help with our losses so why accumulate additional losses. If there isn’t a program created that puts a floor in home prices, or a program that addresses current market values the decline will continue and so will foreclosures. Putting a floor in prices costs more than your plan, but it will work and in the long run benefit most involved in the process. Limiting help to adjusting interest rates and payment amount on ARMS will only have a marginal and only a very temporary impact on the declines in housing, because ARM or no ARM a home worth 40 percent less than the purchase price isn’t worth paying for, and people will not do it. I know several people who have lost their home and just about half lost it by choice not circumstance. In my opinion if you want to stop the downward spiral in housing prices you must fix the price and combine that with a fixed rate mortgage that makes sense.
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Interesting; but there is one omission, which I think is glaring from the taxpayer viewpoint. If there is appreciation in the property and the bailed out homeowner sells, there should be a repayment of any forgiveness in the debt. Otherwise, the homeowner could profit at the taxpayer’s cost.
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Andrew Nichols (2 comments) Reply:
October 25th, 2008 at 6:52 am
Ignore the comment - you have it cobered - I didn’t see the last section
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I always have a bit different angle of looking of things, although I think many of you have raised some very good points and I’m encouraged by the waking up of many persons.
I don’t think the “root of the problem” is the frozen credit or “irresponsible” borrowers or even the house bubble. These are only symptoms of a more profligating disease - an addiction, to be more precise. And some of you have eluded to this problem.
What I’m believing, and have for many years, is that we find ourselves in a predicament that requires some help from the government at one time or another. The problem with the government is that they seldom help, they just aggravate the problems (which now, I think, everyone can see). And they can’t help only one person, they have to help “everyone” with encompassing legislation. This legislation, in almost every case, doesn’t help “everyone”, but everyone does get hurt, by paying more taxes and the subsequent inflation. The “Bailout” is the latest ruse to get more government, more taxes, more drugs, more regulations and more poor people. I don’t know if this should be called “socialism” or “bushism” or what. I do know that it has started a long time ago and now it is causing too many problems to address in this short comment. We don’t need another “plan” to address yet another symptom. We don’t need help for everyone who is hurting, because all of us are hurting. What we need is to get off of the government teet. Not just the welfare recipients, or the big pharma, or the “rich”, or the bankers, or home owners, or imaginary terrorists, or oil, or the medical industry, or education or whatever - we just need to stop this insanity. The only beneficiaries of these policies is the puppet masters - the 400 or so people who are controling us and making way too much in proportion of their contribution. I believe that the role of government is 1) to protect us from other governments (global economies, don’t help), 2) to provide infrastructure (highways and such), 3) to protect the law (like prosecuting the scam artists that are so prevalent these days*), and 4) to protect us by understandable and relatively benign legislation. The government has a tendency to expand, and that requires constant vigilance to curtail this. The government has, and has for many years, pushed the limits too far and we just can’t borrow or steal or pay for this anymore. This country used to be a great and proud nation, started by an idea of self sufficiency and democracy. Now we are a bunch of whining, painful people looking for the next government fix. All of the “plans” that I’ve seen so far, are just like looking for a dry place to hang up your socks, when the boat is sinking. Like most addiction recoverys, it will not be pleasant, but the relief will be almost immediate.
I believe that Ron Paul is our only, last and best hope.
*My solution for this current problem, is to uphold the law. Credit shouldn’t cost an arm and a leg. These contracts should be outlawed, because of the outrageous rates, costs and penalties. Stop the loan sharking from banks, investment companies, Wall Street and credit cards and that problem will right itself.
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Please open a URL “STOP Foreclosures.com” blast email on the social networks, (Mt Space etc…) to get attention, that will drive a network like FOX to afford you the platform to ask America to send an email to their Senators and Congressperson. KISS Keep It Simple Stupid…when John Q. Public visits the “STOP Foreclosure.com” there is a letter which puts forward your solution, with millions of emails going in congress will act…the email is forwarded to their representatives if they simply enter their name and zip code…its Nike time “Just Do It’
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24 countries in the world have a much higher standard of living than the US and all 24 of them have some form of Soacialism or should we say Social Responsibility. They have a better life style because they put people before money. Those governments, who also practice a free market, have decided however that the people they represent are more important than the wealth of the few. They ensure that all citizens have fundamental needs met like health care, utility services, affordable food, housing and they don’t let you rot away when you reach old age. They do pay higher taxes but taxes are only money and people are more important to them than money. If a government does not provide basic protections and insure the basic needs of its people are met then what is the need for government at all? We might as well live in a dog eat dog, survival of the fittest world where only the strong surrvive.
The lower class is a byproduct of the upper class exploiting them for personal gain. It remains a true government’s responsibility to maintain equity because the upper class needs the lower class to exploit. As the lower class has been growing over the past many years, the upper class is running out of customers and hence we have an economic depression. While we pretend to have a free market that “balances” itself out however, we are in a global economy that has to interact with economies that have help from their governments which put their people’s interests first while our government’s priorities rely on the drive of our people to make more money. The playing field is not level and we are losing the competition for wealth and the game of life. While the 24 countries who are ranked higher than us enjoy the combined fruits of capitalism and the many benefits of Social Responsibility, we are stuck in a rat race to produce more wealth for the upper class driven by their pursuit for money. When profits fall over here the companies look for ways to eliminate workers thus reducing customers. In other parts of the world they adapt to lower profit and strive to keep people working. When the world economy slows down, our system breaks down from the lack of customers but they still have the support of their governments and their people’s needs are met.
Social Responsibility or call it what you like but until we change our government’s focus on the people and away from the money we will continue to decline in the world. There has to be a balance between providing the basic needs of society and allowing the financially driven to create wealth. This country has for far too long let the interests of those seeking wealth take precedence over the needs of the rest of society. If our government does not help people over money in this crisis then we may be seeing the beginning of the end for US.
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This is a great solution - I agree that people have over extended themselves; however, do we want to see the market go down more than it has and cause more layoffs in our society or do we want a solid solution. People, please, non of us are happy with the way things are right now, but as a country, we need to overcome this and turn our great country around. If we help these folks stay in their homes - that is the ONLY solution. For those of us who do own homes, we can not afford to allow the value to decrease any more than it already has.
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I am nearing retirement. A majority of my savings has been invested in real estate for my retirement. I have always put at least 25% down on my properties. Four years ago I refinanced a number of my properties at the advice of my accountant into adjustable rates so we could lower or monthly payments and pay more toward principal. The intention when I retired was to have lower principal balances on 50% of my property, sell them and pay off the balances of the others in full. The occupancy status of my properties does not make my situation any different than one that is owner occupied. I am still upside down in my value and I have spent thousands and thousands of dollars toward my princial that most owner occupants more than likely have not. One of my properties in Las Vegas has gone down 50% becasue my owner occupying neighbor went into foreclosure and sent the value of my property plumeting. The non owner property going into foreclosure will continue to pose a threat to the balance of the market and the solution needs to apply to all realestate not just owner occupied. Also how can I help get your plan adopted? Thank you.
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kiee1 (4 comments) Reply:
November 12th, 2008 at 3:04 pm
Well i will try to keep this going I am also nearing retirement lucky for me most all property paid for 1 Of 3 left to pay off as sec. paulson said today no help for us on my other propertys the taxes continue yo increase because a smaller tax base most of it lakeshore they continue to increase value it is worth less but in the states eyes worth more taxes now equel my house payment in town I will recieve no help the way it sounded today but the empty homes around me drive down the value of my home in the city the holders of this property must begain to maintain it. or it looks like crap some owned by fed some owned by banks I again say these green thumb program have seniors maintain property paint mow lawn trim shrubs will help us hold our value somewhat I have no other idea to solve abandoned property problum as it seems ovious to me no one else will maintain it I called the city to see if I could mow trim was told I would be tresspassing I have no clue what to do hope you have better luck!!!!
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I belive the fed should force lenders to refnace at a fixed rate that refects the true morgage rates. and keep people that are still in there homes. it is the abanded ones that concern me i own 2 proertys one in the city one a lake home 30 acres lake shore I owe nothing on the lake home but taxes continue to rise the county increased the value my taxes are nearing the same ammount as my house patment in town. It makes no sense . i apealed the count now estemates value as if I sold lots have owned it for 40 years. I had planed to donate it to a wildlife org. when i die dont know if I can pay the taxes without selling some lake lots I have a;ways wanted to leave it just wooded\. but the bailout no one should profit If we can keep people in there homes with a new fixed rate loan but at the what is owed . not on todays value. We need to punish lenders who gave out arms . the empty properties need to be maintained or tore down I cant see putting back on the market to a stable price has been established supply and demand will help balance prices to a fair price . we also have to look at income for many has decreased we can not allow emty properties to not be maintained they drive down surrouding property values, no help for the home flippers gamblers that lost.
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Steps should be taken immediately to resolve this crises. To people who have leadership roles and who can make a difference, I ask, please do something now. Generally, I feel this crisis could be fixed and worse pains averted simply by making money (loans) much less expensive, but make it harder to qualify for loans. Immediately act to revise existing loans to make them more affordable and thereby create value for these loans (they are loans worth having). Immediately provide 30 - 100 year amortization periods to current property owners/mortgage holders who need immediate payment relief to reduce monthly payments and infuse new cash into local economies.
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My husband and I are Florida Realtors and are seeing first hand the “death spiral” take place in our community and with our friends & family. We like your plan; it is the first one we have heard that has a reasonable plan of action that could actually make a difference. We would like to submit an idea to you that may address the huge gap in house values between what most people paid and the current market price in places like Florida.
This area has seen a 35-50% DECLINE in equity from the peek between 2005-06, and current market prices. Talk about negative equity! Florida homeowners have a huge gap between what they paid and what the home is worth. Unless homeowners bought their home before the year 2000, have never refinanced, or paid all, or nearly all of the home price when purchased they will not be able to sell for 10 years or more without some kind of assistance. This also means all these homeowners are off the market, and will not be buying anytime soon (decreasing demand).
In other words, all homes purchased or refinanced in Florida from 2000-2007 have negative equity. I realize this is a blanket statement, but I challenge you to look at the real statistics and see for yourself. We know Florida is not the only state suffering at this level.
The question we have is this: How do you address and solve the 35%-50% decline in house values? Even with the incentives you propose it won’t take long for people to realize that if they let their current house go they can almost immediately walk into a better house for less money (thanks to desperate sellers willing to lease/option or owner finance). Once homeowners realize that, with normal appreciation, it will take a minimum of 10 years to break even much less make money on there “biggest investment.” Why would they stick it out?
To stabilize supply and value we must create more demand. Our solution is this:
1) Offer first-time home buyers real incentives:
The government is currently offering a $7500 tax credit for first-time home buyers. It is in the form of a non-interest bearing loan, to be paid back over the next 15 years at $500/yr. Not good enough.
We propose that the government make the $7500 a true tax credit incentive and remove the re-payment feature. This will stimulate greater demand and accessibility with first-time home buyers. It could also be argued that this tax credit should be available to all home buyers.
2) Offer ALL current homeowners a tax credit which is first applied directly to their principal balance:
We absolutely agree with your statements regarding principal reduction. It is not right to penalize homeowners that were good stewards of their finances and did not over leverage or over buy when they purchased a home. BUT, the fact remains that we are all sharing in the financial burden of a massive loss in the value of our homes.
In our opinion, the only way to truly affect this large segment of the population is to reduce the principal amount of their loans, so homeowners are able sell their home when they want to, or more importantly, when they need to sell. Like it or not, this area must be addressed before we will see a stable housing market in Florida.
Our proposed plan is: To give current homeowners a $100,000 tax credit*, spread out over 2-3 years, and make it available to all homeowners (should probably include people & builder/developers with investment properties as well). Parameters could be something like the following:
A government issued $33k credit each year for a 3 year period. It must first be used to pay any kind of homestead debt incurred. 1st Mortgage, 2nd Mortgage, HELOC, etc. Once the principal balances have been paid, the remainder will be applied to any other debts incurred. Credit cards, unsecured lines of credit, business debt etc. And for those few people that have been excellent stewards of all their finances (yes, I know of some) that have little to no debt they will be issued a check; to be used however they see fit. Retirement, college fund, investments, etc.
This kind of plan could be designed on a state-by-state level based on the individual state statistics. Markets that are hardest hit would have a larger credit to off set the decline in house values.
We believe this plan would make a level playing field for the entire housing market and would stabilize prices. Houses would be at or near current values, and no family that was fiscally responsible would be penalized for making sound financial decisions. We are betting this would cost a lot less than $700 BILLION to implement, and could actually stimulate the market in a way that promotes actually fixing the problem, instead of delaying the inevitable outcomes associated with permanent declines in value.
We realize that economics is a complicated endeavor and invite your comments and perspective on these ideas. Economics is not our expertise, so we are sure there is room for improvement. However, we have been on the front lines as Florida Realtors for the past 2 years in one of the hardest hit markets in the state. Many people here want help, but the options for real homeowner help are very difficult and often don’t work very well.
Your ideas in ‘A Solution That Works’ are very good, and we will be sharing your website with others as well as contacting our senators. Please let us know if there is anything else we can do to help facilitate these necessary changes and keep America strong.
* $100k Tax Credit is based on the difference in state median home sales in 2006 & 2008, and the percentage of decline from the price peak around 01/2006 to 10/2008.
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steven (1 comments) Reply:
December 29th, 2008 at 4:44 pm
First Florida steals our retirees and their expenditures; then they overbuild and enjoy the boom that goes with it; and, then they ask us to ‘chip in’ to save their economy, their overblown assets.
Sorry, i can’t spare a dime. Greed (6% commissions, fraudulent appraisals, horrible underwriting practices, deceptive mortgage brokers) should be punished. You enjoyed the good times, live with your mess.
Unless i missed it, there isn’t a word as far as to giving the taxpayers an equity stake for any of its subsidies. Why is your proposal all “Gimme”?
(By the way, what proportion of your 2002 - 2007 real estate earnings have you returned to the community? We’ll give you a tax break. 20 cents on the dollar, over 5 years.)
Yes, i realize the depth of the issue. I am a financial planner with my CFA. Times will be hard, people will be ruined, institutions will be destroyed.
Where does it end? Do we owe every American 2800 sq ft on a 1/4 acre lot? Do we put “two cars in every garage”?
There isn’t an end to your entitlement plan.
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This entire financial meltdown started with the mortgage situation and it needs to end there as well. Here is my plan:
A – FIX the stupid Mark to Market accounting requirements ASAP. Banks are getting killed on mortgages primarily because of stupid accounting rules. This concept needs to go away. As it stands, any stimulus that banks get will just force them to fix their books.
B – Develop a stimulus for the home owners. tax payers. All talk about lowering interest rates WONT DO JACK to fix this crisis! Why, because people will still not get access to the money.
A great interest rate is worthless if you owe $250K and your house is only worth $200k. In fact, banks are requiring a 20% equity position and 800 credit scores to qualify for anything.
We need to get the money to the people and do it NOW before it is even more too late. Any money going to the banks will only end up fixing their balance sheets (remember the mark to market comments above?) Yes….we need to help the banks, but we need to do it by helping the very people that need to spend the money.
- The Fed should issue a certificate to each tax payer. The certificates would be valid for a specific period of time….perhaps 5 or 10 years. This is similar to what the Fed does with VA loans.
- This certificate would entitle the holder to a 5 point mortgage discount rate on any mortgage…current or future. It could be exercised NOW or at a later date as determined by the expiration period. Even if the home is sold, the discount is still valid on the next mortgage.
- The holder could exercise the certificate anytime between now or up to the expiration date. The discount would be valid for ONLY a certain period of time and could rollback through the years. I would recommend a 10 year period. So, over the 10 years, the 5 point discount might be reduced by a 1/2 each year until it returns to zero.
- Each certificate would have a maximum value as set by the program. I would recommend $100,000. This means a married couple would get $200,000 if combined. If a married borrower has a $400,000 loan now at 7%, they would pay 2% on the first $200,000 and then continue to pay 7% on the remaining $200,000.
- The rate decrease would be subsidized by the Federal government and lenders would pay their mortgages to the banks as they always have been. The fed is willing to loan money right now at 1% or even .5% anyway, so the actual cost of the program should be essentially zero! So, rather then loaning money to the banks at this discounted rate, so the banks can simply loan to mortgage holders at a higher rate, the money gets right to the people and would not require a re-finance. Or even worse, the banks may end up otherwise just keeping the money.
- This would place about $400 to $600 per month into the hands of the consumer for a typical mortgage and stop a high percentage of the current foreclosures except in extreme cases where people have simply lost their jobs. However, if we can stop the downward home value spiral, people will end up back to work anyway.
Doing this will put money into the hands of people that need to spend it. While the banks may hate this at first, they will love the fact that foreclosures will stop. Besides, most banks don’t hold the debt anyway. This will also stimulate the housing market by allowing people to buy houses….especially first-time buyers and those you have already lost their homes….it gets them back into the market. Also, everyone is treated fairly.
In addition to perhaps not costing any money to subsidize, tax revenue would actually increase to the federal government because a lower mortgage rate would resul in a reduced tax deduction at the end of the year.
I really think something like this could be implemented right way and would have an immediate impact.
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Let’s talk about greedy, stupid lenders who FORCE the homeowners into bankrupty. I live in Oxnard Ca. in an area of mostly new, i.e. less than 5 year old homes. I bought 3 years ago at the peak, paying 750K for a house that is now worth about 525K. I lost my job in Dec. of 2007, but, fortunately, was able to secure another position. With overtime, and by working 12/14 days, I have been able to continue making my 3000 a month payments. After New Years, due to the economy, the company has now put a limit on overtime, which has cut my income by almost 2000 a month. I called Countrywide, and told them I could no longer afford the 3K a month payments, and asked about refinancing down to the current 4.875 rate, which would lower my payments to around 2400 a month, which I can handle. They refuse to help me because I am not in arrears, and have not missed any payments. They also will not qualify me for a new loan of 480K (my current balance) because my house will not appraise high enough to make the 80% guidelines. So, I have to ask this, what difference does it make how much my house is worth on the market if I am going to remain in it? What difference does it make how much overtime I get if I’m willing to pay the monthly cost? If I can afford 3000 a month, I can certainly afford 2400 a month. There are 4.875 loans available, why can’t I get one? My only option is to quit paying my mortgage, stay in the home as long as I can, put the 3000 a month in the bank ,and then walk away, leaving Countrywide with one more repossed home to sell in a depressed market that won’t bring in the 2400 a month that I’m willing to pay them. Am I the only one who sees the logic of reducing my interest rate to the current level of 4.875%, and allowing me remain in my home?
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