Tuesday, February 17, 2009

• Obama Mitigating Mortgage Foreclosures?

Obama announced that between $50 billion and $100 billion will be spent on making mortgage payments affordable, as part of the giant gamble he and Congress are making, under the title of “stimulus.” No help will be provided for those who made rational decisions on purchases, but ample support will be provided to those who couldn’t afford the homes they signed up for. Rationalizations for such a move are being promoted by the administration, Congress and the MSM. They are easy to dispense, but is such policy right?

Banks are temporarily suspending foreclosings on some home loans until they have had time to understand what the government really intends, and they’ve had a chance to negotiate their way into the handouts. Financial corporations such as Citigroup, Chase & Co., and Morgan Stanley will set a moratorium in place until early March, by which time it is expected that the mortgage modification details will be finalized.

The hard sell for this program uses supposedly sincere reasoning such as, “If the house next to yours is in foreclosure, your home drops in value as well.” That is the big one since instilled fear is an instrumental motivator. At first blush, it sure sounds convincing, but then it settles into your consciousness, and a discomfort begins to shade it’s seemingly benevolent intent. You begin to dissect the soundness of the argument and stand back to look objectively at the whole picture. Where is the common sense?

Who else is thrilled with the Obama and Congress decision to rush into a cash dispensation of such magnitude? Everyone in the bad mortgage food chain is in support of stemming the foreclosure rate. Banks, large and small, are clamoring for more bailout money to cover bad loans they were responsible for providing, and their executives don’t really want to give up the summer home in the Hampton’s. Mortgage brokers, real estate brokers, and homebuyers who are underwater on their house purchase decisions are cheering Obama and Congress. The only ones not in favor are those who made financial decisions diligently, having saved their money and minimized the outlay for shelter as much as they could. We don't need to explore how millions who are renting while saving and waiting for prices to become affordable for their first home, feel about taxpayer money being used to attenuate the drop in real estate values.

Aside from unknown hundreds of billions that will be required to implement such shocking endeavor, Rep. Barney Frank intends to introduce legislation to change bankruptcy law that will enable judges to adjust the principal on mortgages held by homeowners who cannot afford the payments. He plans to provide protection to lenders who reduce already set and contracted interest rates, or change the terms on troubled loans. This movement has enormous ramifications for the long-term viability of the financial services industry. It will certainly impact investors who invest in mortgages with set interest rates and steady returns on investments.

The plan is to reduce potential delinquent borrowers’ payments to as low as 31% or their pre-tax incomes. Evidently those facing foreclosure will get preference on the priority list. It is doubtful that anyone in government will be capable of differentiating fraudsters from intentionally bad decision makers. Who is not on the list? Those who purchased homes well within their financial means. These are also the people who will be paying for their wayward neighbors’ well being. Should renters be given a financial break for having made good decisions, NOT having been seduced by the “no money down” siren’s song, and NOT having lept into the froth of the real estate pool?

We are witnessing the government sliding the country into forced rewarding of bad behavior. This was bad behavior by borrowers, by lenders and by all the middlemen eating off the mortgage loan buffet. In such a program the opportunity for abuse will be significant, and probably uncontrollable. Why would people who purchased automobiles they couldn’t afford not also get bailed out? Didn’t many of these mortgages finance giant TVs and second cars?

The argument for “help” will originate from all corners of the economy. Across the U.S., businesses are preparing their theatrical presentations for requests of a piece of the bailout pie. With the trillions of dollars being loosened from the grasp of future generations by the government, it is understandable that the line-up extends invisibly over the horizon. There is no indication from any source, and certainly not from Obama, Congress or their economists friends, as to how any of these trillions will be repaid. They are probably afraid to face the real answer. Public reaction would be immediate.

Some of the answer for return to a healthy economy rests in individual responsibility for reasonable behavior, enhanced with large doses of education. The government should consider spending money on educating the whole population on the management of money, and on making sound financial decisions, particularly those pertaining to housing. The result would be much less self-destructive behavior. It wasn’t the fine print that burned borrowers, it was the big, bold print. This is one of those areas where even a little knowledge would go a long way.

This dramatic shift of government intervention into the economy from the backs of future generations with no plan or concept for recovery is a realm never before experienced, not even in the 1930s. The added measure of placing additional burden, even punishment, on those who have made the right financial decisions in their lives, is also beyond the pale of reason. The only ones in support of these measures are those with a stake in the game, or those panicked into thinking it is necessary, or possibly those who don’t pay taxes. It would be more reasonable to offer strong incentive such as long term zero interest loans to new home buyers who can come up with large down payments. There is also ample room for the government to positively influence the "renegotiation" of underwater mortgages, however, the government’s unreasonable and unbalanced current plans with this program are extremely difficult to comprehend.

24 comments:

  1. Your post is several months/years out of date. When the subprime mess fist started that would have been true, but it hasn't been for a while, the congation has spread from those who should have never bought a house to those who were responsible and put down a decent downpayment and seen thier equity evaporate, add in a job loss and it's not the undocumented illegal alien who is losing thier home but average joe middle class.

    rob in madrid

    ReplyDelete
  2. Your post is several months/years out of date. When the subprime mess fist started that would have been true, but it hasn't been for a while, the congation has spread from those who should have never bought a house to those who were responsible and put down a decent downpayment and seen thier equity evaporate, add in a job loss and it's not the undocumented illegal alien who is losing thier home but average joe middle class.

    rob in madrid

    ReplyDelete
  3. rob in madrid,

    Thanks for the note. I did not specifically refer to sub-prime, or even to normal interest/structure mortgages, but I am considering all mortgages. If the borrower is under water on the loan, it is completely unreasonable to expect those taxpayers who remain "above" water to help finance those debts.

    While there are details that have not been worked out in this program, the concept is a disaster waiting to happen.

    ReplyDelete
  4. Foreclosure is the major cause of our financial crisis. Government should really prioritize this issue.We should really keep ourselves updated.Thanks for sharing your thoughts.Good Day!

    ReplyDelete
  5. Hi -

    Trying to legislate their way out of a financial crisis that they themselves built, Congress is indeed making things worse: Senator Frank's idea of forcing readjustment of mortgages to match the client's ability to pay is financial and economic nonsense, and can only make sense when one understands that Frank is trying to hide his own responsibility.

    This isn't a disaster waiting to happen: it's a very slow motion train wreck of a history of really bad ideas - CRA, subprimes and the rest - colliding with reality.

    ReplyDelete
  6. Hi -

    Nice post.

    This is not a disaster waiting to happen, but rather a very slow-motion train wreck unfolding before our eyes: the train is the slew of bad ideas that the Democrats have come up with - CRA and the resulting subprimes from the Clinton years, now the "Stimulus" bill from Obama - starting to collide with the cold, hard facts of economic and financial reality. Barney Frank is the engineer and Chris Dodd the conductor, with President Obama sitting in first class wondering why things are slowing down.

    Of course, President Bush got off at the last station.

    ReplyDelete
  7. Throwing good money after bad is never a good idea. Rewarding irrational decisions is rewarding failure. It's the grown up version of AYSO where every team gets trophys. Even the team that finished 11th out of 10 teams! Whatever happened to responsibility and rewarding those that make sound decisions? I guess we have entered an alternate universe where reality is inverted.

    ReplyDelete
  8. I don't think you are using "underwater" in the proper sense. dictionary.com defines it as Of or relating to a stock option for which the option exercise price is higher than the market price of the stock. In terms of housing, that would mean anyone who owes more than their house is worth.

    I fall into that category, but I neither support nor benefit from this plan. Being underwater is a necessary but not sufficient condition - you also have to be not paying your mortgage. I may owe more than my house is worth, but I'm still paying for it, and have no desire to pay for those who are treating their mortgages as some sort of option.

    ReplyDelete
  9. mad anthony,

    Thanks for providing the definition, and as it has been presented by Obama and Congress, my use of the term in the article stands until the confusion around this badly conceived program bis lifted. We won't hold our collective breaths. The fact that you may not personally be "underwater" as concerns your ability to make your monthly payments, if your home is worth less than the total of your mortgage, it is considered to be "underwater."

    In the meantime, I feel for your plight, and empathize with your sentiment.

    ReplyDelete
  10. We lost our New Orleans home in the flooding caused by Hurricane Katrina, as did so many others. As a function of supply and demand, prices of habitable homes in the area increased significantly.

    I still had a job in New Orleans (thank goodness), and needed a place for myself and my family to live. So we bought another home despite the inflated prices.

    We used the insurance proceeds from the damaged house to (A) pay off the previous mortgage and (B) make a substantial down payment on the new house. In fact, we paid about 40% of the price of the new house up front to keep our monthly mortgage payments at a reasonable level.

    As homes have been rebuilt in the New Orleans area, the value of the home we purchased has gone down significantly, again as a function of sipply and demand. But we don't qualify for anything under the Obama plan because (1) we were responsible and made a large initial payment -- thus we are not "underwater" even though the home is now worth much less than we paid for it, and (2) we have been diligent in making our monthly mortgage payments. I might add that homeowners insurance rates shot up after the hurricane; thus our monthly payment is substantial even though the mortgage is only for about 60% of the purchase price.

    I empathize with those who have been hurt by the decline in property values, but as a matter of principle I don't think the government has any business bailing them out.

    If there is to be a bailout, I have a hard time with the concept that we cannot benefit from it because we behaved responsibly and reduced the principal on our mortgage, thus effectively disqualifying ourselves from eligibility. As noted above our home has declined greatly in value; the only reason was are above vater is that we put all available money toward the principal.

    ReplyDelete
  11. "Many people took out loans they were never going to be able to afford,
    never! That means somebody knew from day one they were never going to
    be able to pay back the loans." The bankers approved these loans and used the money to pay themselves bonuses and payed our government representatives to look the other way…that’s where we are…any suggestions for getting us out of the mess are welcome…but if you just want to play the blame game…where does that get us?

    Read what was spammed on the comments section of my blog:



    The people that bend the rules GET PAID!

    You too can bend the rules by printing out fake paystubs w-2 w2 1099 forms using
    http://www.PROOFOFEMPLOYMENT.com

    Buy a home, car or get a huge irs tax refund just for being you! Do what you have to do to get yours! EVERYONE ELSE DID!!

    http://www.FAKEPAYCHECKSTUBS.com

    Print out Fake Employment and Fake Income, Wages, 1099, w2, w-2, using your home computer printer!



    Oy vey!!

    ReplyDelete
  12. "Many people took out loans they were never going to be able to afford,
    never! That means somebody knew from day one they were never going to
    be able to pay back the loans." The bankers approved these loans and used the money to pay themselves bonuses and payed our government representatives to look the other way…that’s where we are…any suggestions for getting us out of the mess are welcome…but if you just want to play the blame game…where does that get us?

    Read what was spammed on the comments section of my blog:



    The people that bend the rules GET PAID!

    You too can bend the rules by printing out fake paystubs w-2 w2 1099 forms using
    http://www.PROOFOFEMPLOYMENT.com

    Buy a home, car or get a huge irs tax refund just for being you! Do what you have to do to get yours! EVERYONE ELSE DID!!

    http://www.FAKEPAYCHECKSTUBS.com

    Print out Fake Employment and Fake Income, Wages, 1099, w2, w-2, using your home computer printer!



    Oy vey!!

    ReplyDelete
  13. "The government should consider spending money on educating the whole population on the management of money, and on making sound financial decisions, particularly those pertaining to housing" - Raider.

    Are you kidding me? We face a problem of enormous proportions caused by too much irresponsible spending of borrowed money. Our Government's solution to such problem is to recklessly spend even larger amounts of borrowed money. The last entity any individual should be taking financial advice from is a Government that is more than $10 trillion in debt! However, I fully support any legislation that mandates all High School students must pass a basic Macro and Microeconomics course prior to graduating. It is appalling that we release 18 yr olds - old enough to sign up for a credit card - into the world with a diploma in hand and no economic nor financial literacy in their heads.

    The possibility of experiencing an "underwater" mortgage is just one of the downside risks to owning a home. In fact it is probably the largest negative aspect of homeownership. When home values decrease you still owe the same amount as you did when home values increased. The payment stays the same no matter what and that's because you agreed to repay 'X' amount of money over the course of 'X' number of years. During the years when home values skyrocketed I never heard of any homeowners begging to pay more on their mortgage in order to reflect the new and inflated value of their home.

    -J. Alvey

    ReplyDelete
  14. "responsible and put down a decent downpayment and seen their equity evaporate, add in a job loss and it's not the undocumented illegal alien who is losing their home but average joe middle class."

    Here is what I don't get.... I had a mortgage for the longest time when I lived in Chicago. From 1997 to 2005 and during that time I found myself unemployed 3 times. Fortunately for me I saved money and used it to get me through this time while I pounded the pavement and looked for a new job. The last time I took a new job in Chicago my salary was cut in 1/2 but I took the job because I needed to pay my mortgage. I find it amazing how many people use this as a victimhood excuse. I thought it was the naturatl part of living in the us with a career. For years people have been unemployed and they survived, how come now we have to subsidize unemployed people? Does this mean I can count on being subsidized when I quit the job I hate? I really don't understand.. Its as if our country is run by 30 and under folks. Nothing against them except they were raised in this entitlement era and never really saw or experienced sacrifice like us older folks.

    ReplyDelete
  15. Government Role in Solving the Housing Crisis

    When you look at today’s housing and economic crisis few will argue that the root of the problem is residential housing. Look at the economic stimulus plan it does not properly address the root problem which is housing and the deflation that has attacked this market segment, causing psychological contagion in the broader economy through he credit market and ultimately to the spending habits of both the consumer and business decision makers. I conclude we need economic stimulus, however, it must start where the root problem started to build the confidence in consumer spending that is the prime of the pump to recovery. Jobs are no doubt an issue that need to be addressed, I contend that by addressing the housing market first we can begin the recovery process. Looking at the major pockets of homeowners today and break them into four groups:

    1) Prudent: Able to pay today and always has been.
    2) Tapped Out: Can pay today barely, but have no additional discretionary funds.
    3) On the Edge: Can pay today but will not be able to pay when mortgage adjusts higher when the inevitable inflation comes from our spending.
    ` 4) Speculator :Can not pay today and never could support the debt load but had a mortgage granted none the less. Got the home on the concept that leverage would enable them to obtain more debt than they could afford and if it got bad they could sell for a profit. This is a very popular concept in hot markets and worked through 2005.


    What kind of a comprehensive plan can we use to stabilize values and then rebuild confidence without unjustly rewarding people who speculated either with many homes or a mcmansion to the detriment of us all? What tools are available in the marketplace already that only need to be enhanced or authorized to create activity and stabilize the residential market? My plan is five fold:

    1) Fannie and Freddie : Need to expand the refinance market for low rate 40 year fixed rate loans for clients that are able to demonstrate the ability to repay these loans. This will enable the borrower to avoid interest resets ( fro current ARM loans) that are coming, to reduce more foreclosures by decreasing the tapped out, and on the edge homeowners from failing. Policy steps will need to be put in place to eliminate the client from increasing the size of the loan with government loan subsidizing the interest rate. You will also have to allow the loans to be done in declining markets where the client has no remaining equity in the home. If you paid $200,000 in 2005 and borrowed $160,000 yet your home is now worth $120,000 we need to allow the borrower to refinance the $160,000 outstanding balance to take advantage of the lower rate so that they can afford to pay through until markets rebound even if takes a decade. We need to make it easier to pay through the crisis rather than give the house back to the bank ( or whatever entity the note currently resides with). If the client can not afford the payments because they have a mortgage they never should have been allowed to get then the market must force the eviction process to take place and put that family back to the rental pool no mater how painful that is. The market needs to have a bottom and a consequence for those who speculated and lost. By allowing speculators to keep the house when they can not pay through long court processes of foreclosure, then extended by bankruptcy only slows the recovery phase.

    2) FHA loans: I propose that the government authorize a major government backed loan program for marginal clients to buy new homes. What we need is many first time homebuyers to get a home now with the lower cost homes many simply can not qualify in today credit market, this is the role of government. This is only for those who can demonstrate the ability to repay the loan (verify income) even though they have some sort of blemish in their employment or credit history or a lack of a down payment. This will be expensive, if you set up a 2.5 billion dollar, 40% may default with the lax standards and when you take back the property and liquidate you will loose half your money so this is a 100 billion expected cost for this program. However when you look at an average cost of $200,000 this is 2.5 million homes that are purchased and that is very important to fixing the crisis.

    3) Provide a tax credit that declines year over year for the purchase of residential real estate. Start in 2009 at 8% then in 2010, then drop credit to 6% , 2011 declines to 4 % 2012 further declines to 2% 2013 to 1%. You can spread out the tax credit over 4 years. You would need to make AMT exempt as the AMT taxpayer is the one with the wherewithal to make a prudent purchase but has too much fear to buy today. Tax credits are not available for any property with a building permit after January, 1 2009, these homes should not be built in this economic environment anyway.

    4.) Encourage an asset backed loan through the FDIC for clients that have no income documented on tax returns, provided that the assets they have are pledged. Allow the banks to charge for this privilege of loans with cross collateralized assets in addition to the home. This is important for a retired person who may have no taxable income given the stock market, but can repay. For self employed borrowers the excuse has always been that they expense everything to minimize taxes, that is fine if you do not want to pay in, but now it time to pay the consequences, do not ask for help when you do not want to pay in. Take your assets and pledge them in addition to the home or pay taxes.


    4) I would further stipulate more regulation on the industry on terms of predatory lending. Currently mortgage professionals are compensated based on the their ability to have a client accept a higher rate for their mortgage. This is in direct opposition to a clients interest. The entire compensation mechanism is broken.

    5.) Spell out from the FBI that there will zero tolerance for fraud and set up a hotline for enforcement and provide a budget for effective enforcement.

    6) Encourage the borrower who can not afford to retain a home to participate effectively in the transfer of property back to the lender. Create a system of carrot and stick that helps clean out the system and creates a bottom.

    Put this type of aggressive plan in action you will impact all four of the borrower groups those who have been prudent and can afford top pay will get reduced rates in the current marketplace. Those who are tapped out, or on the edge will get payment relief and more disposable income to place into the economy as well as have an incentive to pay through to the next housing boom as the business cycle theory has always come true. We need to stop those who have an adjustable rate from getting crushed and loosing their home when adjustable rates eventually go up. Finally you need to have those who never could afford the home displaced.

    How do you stabilize the market while flushing out those who can not afford the home?

    You create demand by making the home more affordable with lower rate mortgages, you make more people who can qualify for a mortgage, and you get people off the fence and create a call to action with tax credits.

    You reduce the inventory by slowing the inventory coming onto the market. , Tax credits can only be used on existing inventory not for building more inventory. Keep more people in the home they have today. For all to many homeowners selling is not an option they do not have enough money to cover the shortfall between selling price less commissions plus costs and the mortgage balance, (paying through the crisis) by allowing mortgages for borrowers who have negative equity so long as they can demonstrate the ability to repay the loan.

    Every bottom has a defining event, this one will be the recognition that those who can not pay will in fact loose the home and have to go to a rental market. This will increase the need for rental housing and in conjunction the tax credit will provide the incentive for people to become landlords for these homes.

    Once we stabilize the residential market, the confidence will resume for people to spend in a more prudent manner which will help lift the economy. This solution can not work in a vacuum but in conjunction with measures that are building other segments of the economy. This will get the consumer to a steady state and make them able to spend again as the residential real estate market levels out and turns around. Without these measures we will see a longer deeper and more protracted deflation in the housing market that will prevent the broader economy from growing jobs, and increased consumer spending.

    This process will have to happen before the business segment can begin capital spending and job growth.


    Charlie Dowd

    ReplyDelete
  16. Government Role in Solving the Housing Crisis

    When you look at today’s housing and economic crisis few will argue that the root of the problem is residential housing. Look at the economic stimulus plan it does not properly address the root problem which is housing and the deflation that has attacked this market segment, causing psychological contagion in the broader economy through he credit market and ultimately to the spending habits of both the consumer and business decision makers. I conclude we need economic stimulus, however, it must start where the root problem started to build the confidence in consumer spending that is the prime of the pump to recovery. Jobs are no doubt an issue that need to be addressed, I contend that by addressing the housing market first we can begin the recovery process. Looking at the major pockets of homeowners today and break them into four groups:

    1) Prudent: Able to pay today and always has been.
    2) Tapped Out: Can pay today barely, but have no additional discretionary funds.
    3) On the Edge: Can pay today but will not be able to pay when mortgage adjusts higher when the inevitable inflation comes from our spending.
    ` 4) Speculator :Can not pay today and never could support the debt load but had a mortgage granted none the less. Got the home on the concept that leverage would enable them to obtain more debt than they could afford and if it got bad they could sell for a profit. This is a very popular concept in hot markets and worked through 2005.


    What kind of a comprehensive plan can we use to stabilize values and then rebuild confidence without unjustly rewarding people who speculated either with many homes or a mcmansion to the detriment of us all? What tools are available in the marketplace already that only need to be enhanced or authorized to create activity and stabilize the residential market? My plan is five fold:

    1) Fannie and Freddie : Need to expand the refinance market for low rate 40 year fixed rate loans for clients that are able to demonstrate the ability to repay these loans. This will enable the borrower to avoid interest resets ( fro current ARM loans) that are coming, to reduce more foreclosures by decreasing the tapped out, and on the edge homeowners from failing. Policy steps will need to be put in place to eliminate the client from increasing the size of the loan with government loan subsidizing the interest rate. You will also have to allow the loans to be done in declining markets where the client has no remaining equity in the home. If you paid $200,000 in 2005 and borrowed $160,000 yet your home is now worth $120,000 we need to allow the borrower to refinance the $160,000 outstanding balance to take advantage of the lower rate so that they can afford to pay through until markets rebound even if takes a decade. We need to make it easier to pay through the crisis rather than give the house back to the bank ( or whatever entity the note currently resides with). If the client can not afford the payments because they have a mortgage they never should have been allowed to get then the market must force the eviction process to take place and put that family back to the rental pool no mater how painful that is. The market needs to have a bottom and a consequence for those who speculated and lost. By allowing speculators to keep the house when they can not pay through long court processes of foreclosure, then extended by bankruptcy only slows the recovery phase.

    2) FHA loans: I propose that the government authorize a major government backed loan program for marginal clients to buy new homes. What we need is many first time homebuyers to get a home now with the lower cost homes many simply can not qualify in today credit market, this is the role of government. This is only for those who can demonstrate the ability to repay the loan (verify income) even though they have some sort of blemish in their employment or credit history or a lack of a down payment. This will be expensive, if you set up a 2.5 billion dollar, 40% may default with the lax standards and when you take back the property and liquidate you will loose half your money so this is a 100 billion expected cost for this program. However when you look at an average cost of $200,000 this is 2.5 million homes that are purchased and that is very important to fixing the crisis.

    3) Provide a tax credit that declines year over year for the purchase of residential real estate. Start in 2009 at 8% then in 2010, then drop credit to 6% , 2011 declines to 4 % 2012 further declines to 2% 2013 to 1%. You can spread out the tax credit over 4 years. You would need to make AMT exempt as the AMT taxpayer is the one with the wherewithal to make a prudent purchase but has too much fear to buy today. Tax credits are not available for any property with a building permit after January, 1 2009, these homes should not be built in this economic environment anyway.

    4.) Encourage an asset backed loan through the FDIC for clients that have no income documented on tax returns, provided that the assets they have are pledged. Allow the banks to charge for this privilege of loans with cross collateralized assets in addition to the home. This is important for a retired person who may have no taxable income given the stock market, but can repay. For self employed borrowers the excuse has always been that they expense everything to minimize taxes, that is fine if you do not want to pay in, but now it time to pay the consequences, do not ask for help when you do not want to pay in. Take your assets and pledge them in addition to the home or pay taxes.


    4) I would further stipulate more regulation on the industry on terms of predatory lending. Currently mortgage professionals are compensated based on the their ability to have a client accept a higher rate for their mortgage. This is in direct opposition to a clients interest. The entire compensation mechanism is broken.

    5.) Spell out from the FBI that there will zero tolerance for fraud and set up a hotline for enforcement and provide a budget for effective enforcement.

    6) Encourage the borrower who can not afford to retain a home to participate effectively in the transfer of property back to the lender. Create a system of carrot and stick that helps clean out the system and creates a bottom.

    Put this type of aggressive plan in action you will impact all four of the borrower groups those who have been prudent and can afford top pay will get reduced rates in the current marketplace. Those who are tapped out, or on the edge will get payment relief and more disposable income to place into the economy as well as have an incentive to pay through to the next housing boom as the business cycle theory has always come true. We need to stop those who have an adjustable rate from getting crushed and loosing their home when adjustable rates eventually go up. Finally you need to have those who never could afford the home displaced.

    How do you stabilize the market while flushing out those who can not afford the home?

    You create demand by making the home more affordable with lower rate mortgages, you make more people who can qualify for a mortgage, and you get people off the fence and create a call to action with tax credits.

    You reduce the inventory by slowing the inventory coming onto the market. , Tax credits can only be used on existing inventory not for building more inventory. Keep more people in the home they have today. For all to many homeowners selling is not an option they do not have enough money to cover the shortfall between selling price less commissions plus costs and the mortgage balance, (paying through the crisis) by allowing mortgages for borrowers who have negative equity so long as they can demonstrate the ability to repay the loan.

    Every bottom has a defining event, this one will be the recognition that those who can not pay will in fact loose the home and have to go to a rental market. This will increase the need for rental housing and in conjunction the tax credit will provide the incentive for people to become landlords for these homes.

    Once we stabilize the residential market, the confidence will resume for people to spend in a more prudent manner which will help lift the economy. This solution can not work in a vacuum but in conjunction with measures that are building other segments of the economy. This will get the consumer to a steady state and make them able to spend again as the residential real estate market levels out and turns around. Without these measures we will see a longer deeper and more protracted deflation in the housing market that will prevent the broader economy from growing jobs, and increased consumer spending.

    This process will have to happen before the business segment can begin capital spending and job growth.


    Charlie Dowd
    CharlesDowd@comcast.net

    ReplyDelete
  17. Government Role in Solving the Housing Crisis

    When you look at today’s housing and economic crisis few will argue that the root of the problem is residential housing. Look at the economic stimulus plan it does not properly address the root problem which is housing and the deflation that has attacked this market segment, causing psychological contagion in the broader economy through he credit market and ultimately to the spending habits of both the consumer and business decision makers. I conclude we need economic stimulus, however, it must start where the root problem started to build the confidence in consumer spending that is the prime of the pump to recovery. Jobs are no doubt an issue that need to be addressed, I contend that by addressing the housing market first we can begin the recovery process. Looking at the major pockets of homeowners today and break them into four groups:

    1) Prudent: Able to pay today and always has been.
    2) Tapped Out: Can pay today barely, but have no additional discretionary funds.
    3) On the Edge: Can pay today but will not be able to pay when mortgage adjusts higher when the inevitable inflation comes from our spending.
    ` 4) Speculator :Can not pay today and never could support the debt load but had a mortgage granted none the less. Got the home on the concept that leverage would enable them to obtain more debt than they could afford and if it got bad they could sell for a profit. This is a very popular concept in hot markets and worked through 2005.


    What kind of a comprehensive plan can we use to stabilize values and then rebuild confidence without unjustly rewarding people who speculated either with many homes or a mcmansion to the detriment of us all? What tools are available in the marketplace already that only need to be enhanced or authorized to create activity and stabilize the residential market? My plan is five fold:

    1) Fannie and Freddie : Need to expand the refinance market for low rate 40 year fixed rate loans for clients that are able to demonstrate the ability to repay these loans. This will enable the borrower to avoid interest resets ( fro current ARM loans) that are coming, to reduce more foreclosures by decreasing the tapped out, and on the edge homeowners from failing. Policy steps will need to be put in place to eliminate the client from increasing the size of the loan with government loan subsidizing the interest rate. You will also have to allow the loans to be done in declining markets where the client has no remaining equity in the home. If you paid $200,000 in 2005 and borrowed $160,000 yet your home is now worth $120,000 we need to allow the borrower to refinance the $160,000 outstanding balance to take advantage of the lower rate so that they can afford to pay through until markets rebound even if takes a decade. We need to make it easier to pay through the crisis rather than give the house back to the bank ( or whatever entity the note currently resides with). If the client can not afford the payments because they have a mortgage they never should have been allowed to get then the market must force the eviction process to take place and put that family back to the rental pool no mater how painful that is. The market needs to have a bottom and a consequence for those who speculated and lost. By allowing speculators to keep the house when they can not pay through long court processes of foreclosure, then extended by bankruptcy only slows the recovery phase.

    2) FHA loans: I propose that the government authorize a major government backed loan program for marginal clients to buy new homes. What we need is many first time homebuyers to get a home now with the lower cost homes many simply can not qualify in today credit market, this is the role of government. This is only for those who can demonstrate the ability to repay the loan (verify income) even though they have some sort of blemish in their employment or credit history or a lack of a down payment. This will be expensive, if you set up a 2.5 billion dollar, 40% may default with the lax standards and when you take back the property and liquidate you will loose half your money so this is a 100 billion expected cost for this program. However when you look at an average cost of $200,000 this is 2.5 million homes that are purchased and that is very important to fixing the crisis.

    3) Provide a tax credit that declines year over year for the purchase of residential real estate. Start in 2009 at 8% then in 2010, then drop credit to 6% , 2011 declines to 4 % 2012 further declines to 2% 2013 to 1%. You can spread out the tax credit over 4 years. You would need to make AMT exempt as the AMT taxpayer is the one with the wherewithal to make a prudent purchase but has too much fear to buy today. Tax credits are not available for any property with a building permit after January, 1 2009, these homes should not be built in this economic environment anyway.

    4.) Encourage an asset backed loan through the FDIC for clients that have no income documented on tax returns, provided that the assets they have are pledged. Allow the banks to charge for this privilege of loans with cross collateralized assets in addition to the home. This is important for a retired person who may have no taxable income given the stock market, but can repay. For self employed borrowers the excuse has always been that they expense everything to minimize taxes, that is fine if you do not want to pay in, but now it time to pay the consequences, do not ask for help when you do not want to pay in. Take your assets and pledge them in addition to the home or pay taxes.


    4) I would further stipulate more regulation on the industry on terms of predatory lending. Currently mortgage professionals are compensated based on the their ability to have a client accept a higher rate for their mortgage. This is in direct opposition to a clients interest. The entire compensation mechanism is broken.

    5.) Spell out from the FBI that there will zero tolerance for fraud and set up a hotline for enforcement and provide a budget for effective enforcement.

    6) Encourage the borrower who can not afford to retain a home to participate effectively in the transfer of property back to the lender. Create a system of carrot and stick that helps clean out the system and creates a bottom.

    Put this type of aggressive plan in action you will impact all four of the borrower groups those who have been prudent and can afford top pay will get reduced rates in the current marketplace. Those who are tapped out, or on the edge will get payment relief and more disposable income to place into the economy as well as have an incentive to pay through to the next housing boom as the business cycle theory has always come true. We need to stop those who have an adjustable rate from getting crushed and loosing their home when adjustable rates eventually go up. Finally you need to have those who never could afford the home displaced.

    How do you stabilize the market while flushing out those who can not afford the home?

    You create demand by making the home more affordable with lower rate mortgages, you make more people who can qualify for a mortgage, and you get people off the fence and create a call to action with tax credits.

    You reduce the inventory by slowing the inventory coming onto the market. , Tax credits can only be used on existing inventory not for building more inventory. Keep more people in the home they have today. For all to many homeowners selling is not an option they do not have enough money to cover the shortfall between selling price less commissions plus costs and the mortgage balance, (paying through the crisis) by allowing mortgages for borrowers who have negative equity so long as they can demonstrate the ability to repay the loan.

    Every bottom has a defining event, this one will be the recognition that those who can not pay will in fact loose the home and have to go to a rental market. This will increase the need for rental housing and in conjunction the tax credit will provide the incentive for people to become landlords for these homes.

    Once we stabilize the residential market, the confidence will resume for people to spend in a more prudent manner which will help lift the economy. This solution can not work in a vacuum but in conjunction with measures that are building other segments of the economy. This will get the consumer to a steady state and make them able to spend again as the residential real estate market levels out and turns around. Without these measures we will see a longer deeper and more protracted deflation in the housing market that will prevent the broader economy from growing jobs, and increased consumer spending.

    This process will have to happen before the business segment can begin capital spending and job growth.


    Charlie Dowd
    CharlesDowd@comcast.net

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  18. %%%%%%%% INTEREST RATE STRUCTURE %%%%%%%%
    THE
    REAL STIMULUS PLAN

    Some time during the Bush administration , he capped interest rates at 25% I believe.
    Then you got a flood of junk mail with credit card offers of interest rates ALL AROUND 25%..
    BANKS popping up everywhere, you couldn't turn around without gettin hit in the face with another offer !!
    Businesses also allow credit and collect later at the max % rate.. WRONG--CASH AND CARRY!!
    Now , I am not against banks makin money, but, the structure of the interest rates are what is killin most...
    Banks , Creditors, Investors all calculate loans interest rates by the SIZE OF THE LOAN.

    Why not calculate it on THE PAYMENT OF THE PRINCIPAL?
    It could put 100's if not 1000's back into our pockets MONTHLY!!!
    WHY NOT DO THIS WITH ALL LOANS, CARS,BOATS,EQUITY LOANS,BUSINESS LOANS,ETC...

    HEY, EVEN OUR OWN GREAT COUNTRY IS DYING IN A SEA OF INTEREST DEBT !!! FROM ALL THEIR SUB-CONTRACTING WHICH HAS THE SAME LOAN REQUIREMENTS ULTIMATELY.

    (I don't believe in credit cards myself and I am still above water, barely, still holdin to a job in the TRUCKING INDUSTRY)

    P.S. and any of these businesses offering pensions should be a little more realistic,, promising something they cannot utimately keep... to may variables...like you may not be in business in a year or 2.

    P.S. HEY PEOPLE JUST KEEP PLUGGIN AWAY, SPEAK -UP IF YOU DON'T AGREE WITH OUR FAITHFUL GOVERNMENT

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  19. Although a loan does not start out as income to the borrower, it becomes income to the borrower if the borrower is discharged of indebtedness.

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  20. So many years the government helped other countries giving millions upon millions adding up to billions upon billions and for what? Now our government is putting the money where it should go (to the people) and people are outraged.
    This is our current financial situation and we need to figure something out or we are ALL doomed.
    Obama knows corruption and greed is the reason for this mess and to make what is wrong right we all need to restructure loans, do everything to avoid forclosure and find ways to keep our economy going by helping small businesses because without jobs, this country will not function. Those of you in government, if private sector is in trouble...you will not have a cush job to go to.

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  21. Thanks for sharing this informative post .

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  22. Thanks for this very nice post. This is something that many should know and I know this is not okay for everyone.

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  23. Thank you for shedding some light on the mess that has become the mortgage industry. Fast cash payday loans are one answer for certain situations. Alexander Hamilton is turning in his grave, I'm sure.

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  24. Obama said that we needed change,"all we have left is pocket change",we are in debt its time to put on your boots the shit is getting deep.We went from a upper class type people to people that cant afford the gas to work,the clothes to put our kids in school we cant afford housing and we are getting laid off with no insurance but these other countries get more help than we have seen ever.USA is the biggest crock of crap i ever saw or will see.

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