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!
57 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.
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