Intelligent Loan Mods & Foreclosure Abatement
Today at 12:15 am, we shall learn of the Obama administration’s new housing plan. I suspect it will have many of the same doomed features as all the other misguided housing plans floating around.
Before getting to those specifics, let’s revisit and recognize several truths:
• Home prices remain elevated;
• Artificially propping up prices is counter-productive;
• Home owers (No equity, 100%+ debt) who are in houses they cannot afford are going to have to move to homes or apartments they can afford;
• Foreclosures/REOs are often costly to banks; The lenders that made these bad loans to unqualified borrowers will suffer write-downs;
• It is not the responsibility of Taxpayers to bailout borrowers who are in over their heads, or lenders that made bad loans.
What are we likely to see from the White House today? I expect to see an over emphasis at stopping foreclosures; a reliance on foreclosure moratoriums; Involuntary loan modifications a/k/a cramdowns; and last, Interest rate deductions;
We would be much better off if we did 3 things:
- Recognize that falling prices will help return the Housing market and the economy back to normalcy. On the basis of either median income to median home price, or Housing value as a percentage of GDP, homes remains significantly overpriced, and need to continue come down in cost;
- Identify those people who cannot afford to be in their houses (Underwater, overpriced, too little income) and help them move into more affordable housing (rental or purchased); Keeping people in homes they cannot afford is counter-productive
- Identify those people who can afford to stay in their homes with a modicum of loan mods/work out. These are the best targets for legitimate foreclosure avoidance.
If they could, banks would prefer to avoid foreclosure. Its an expensive, time consuming process; The REOs are a messy, money losing headache. Any intelligent proposal to reasonably avoid preventable foreclosures would give the banks a big incentive to voluntary participate in loans mods. I believe this is just such a plan.
As we first noted last year in our Housing Proposal (Fixing Housing & Finance: 30/20/10 Proposal), there is a simple way to provide incentive to banks to modify loans: The “30/20/10″ solution:
- 30: Takes up to 30% of any qualifying delinquent mortgage and separate it from the “main” mortgage; it becomes a 2nd, interest free-balloon mortgage. It stays on the books of the present mortgage holder;
- 20: Save 20% of the current delinquent and potential foreclosure properties; Of the 5 million homes that are late in making payments, (the first step along the road to delinquency, default and foreclosure) the process should make 20%, or 1 million homes eligible;
- 10: The Balloon payment comes due in 10 years, and will be treated as a 2nd mortgage, with interest charges only accruing as of October 1, 2018; it can be refinanced or paid off in full.
A few government actions are needed: Make the interest-free balloon loans tax free also; Allow the lenders to set aside these loans without taking any markdown immediately. If it defaults in 10 years, then that is when they take the hit.
There is no reason why those people who are underwater but current would not qualify for such a program.
This plan will allow housing market prices to normalize, keep those loans that are savable from going into default, avoids Moral Hazard, and does not require any taxpayer money. (Which likely means it has no chance whatsoever of being considered).
The mad attempts to avoid any and all foreclosures is counter-productive. The foreclosure process is how an over-priced market returns back to normalcy. That is what is now happening, and excess interference will only slow down the eventual return to a healthy economy.
>
Previously:
Fixing Housing & Finance: 30/20/10 Proposal (September 22nd, 2008)
http://www.ritholtz.com/blog/2008/09/fixing-housing-finance-302010-proposal/
February 18th, 2009 at 7:55 am
[Edit]
To my mind, the greatest tyrant of the 20th/21st century will go down as John Maynard Keynes. As often happens, the pen is mightier than the sword, and the ideas of this British economist appear to me to be on the road to causing the worst economic outcome of our lifetimes. This is economic theory put into motion, and now that the train has left the station, we (the world) are going to ride this train to the end of the line.
Ludwig von Mises is currently out of favor, and the grand experiment is in progress. It certainly appears the fire of stimulus will be stoked white hot..and we’ll just have to live with the results. If this creates a debt our ancestors are paying off long after we are gone, then John Keynes will have reached the apex of tyranny. At least lesser tyrants had their damage undone after a generation…this man’s ideas may follow us long into the future..
http://www.azcentral.com/arizonarepublic/news/articles/2009/02/18/20090218prez-denver0218.html
In Denver, Obama signs $787 billion stimulus package
‘Even before the signing, administration officials refused to rule out the idea that Obama might return to Congress to seek another infusion of cash…”
February 18th, 2009 at 7:59 am
One unintended consequence of many of the schemes that propose to prop up home prices is that people will be less likely to move to where the jobs are, where ever that may be (maybe if they figured out how to encourage more home-based businesses…) Mobility is a key feature of the American economy.
Maybe just give foreclosees an RV: gas is cheap again, it will keep Elkhart Indiana rolling, and all those goofy stickers people put on them is sure to be an American business of the future… “If you lived here, you’d be home.”
http://www.your-rv-lifestyle.com/Elkhart.html
Support RV-based businesses.
February 18th, 2009 at 8:13 am
Great plan Barry – but you are pissing in the wind. Since the nation elected Democrats to run the country, what we will see today is victimology at its best. All homeowners are terrible victims of greedy bankers and corrupt mortgage brokers and must be saved – at any cost. So the “plan” will (re)introduce a variety of ways to keep underwater homeowners and those that cannot afford their homes in those very homes.
Remember what a great man once said, “Government exists to protect us from each other. Where government has gone beyond its limits is in deciding to protect us from ourselves.” – Ronald Reagan.
February 18th, 2009 at 8:13 am
Great post Barry.
These plans are all really schemes…let’s say you owned a home, lost your job and were about to be foreclosed. Lucky for you, your uncle was a billionaire and gave you 200,000 to bail you out. That could work. Now what happens if your uncle himself is in trouble and is over his head in debt? Well that uncle is named Sam and anything he thinks of is a doomed scheme.
February 18th, 2009 at 8:27 am
Nice post Barry. I am confident that the Obama administration will help soften the recession with all the stimulus plans, TARPs and tax breaks. Thus we will avoid depression.
I don’t like the so called free market supporters like Larry Kudlow who are against gvt intervention. These people seem to forget that the main reason for 1929-1932 depression was Government’s inability to stimulate the economy. Only after FDR implemented his “New Deal” did the US economy rebound.
February 18th, 2009 at 8:29 am
great post Barry. I can only hope that you use your clout to get the ear of people who can make a difference – not that they’d listen to reasonable ideas like this.
The administration needs to remember that “homeowner” is not synonymous with “mortgage holder.”
Did you watch CNBC’s special “House of Cards?” It was actually interesting – not too biased either way.
February 18th, 2009 at 8:35 am
@dividendgrowthinvestor-
you have got to be troll. Everything you just said is laughable.
February 18th, 2009 at 8:48 am
I think you nailed it.
The only thing I would add, is a suggestion that the 30% 2nd mortgage aspect be brainstormed around a bit. This is pretty good as is. But I’m wondering if there is some way to securitize that part so it can be sold in a secondary market, basically as some sort of zero coupon paper?
Also, assume a house purchased at an inflated price but financed with below cost interest. Now, the mortgage reprices and the current homeowner can’t afford the new payment. Plus the house falls in price. Coincidentally, the house is now worth what current resident can afford if it were purchased at this value and if it were financed using a standard mortgage. The problem is the fake value still on the books. These people are excellent candidates for keeping the house.
February 18th, 2009 at 8:58 am
Bruce in Tn Says:
[Edit] To my mind, the greatest tyrant of the 20th/21st century will go down as John Maynard Keynes
….Leaving aside the obvious hyperbole of this statement we are, as a Republican president (Nixon) once pointed out “All Keynesian’s now.” Keynesianism has been the prevailing economic philosophy of governments of all colors around the world since the second world war. And it’s worked fairly well. If you want to claim that it’s responsible for the predicament we find ourselves in now, then you have to give it credit for both the huge economic expansion and increase in wealth that’s taken place since 1945 and the absence of a repeat of the great depression. Even the current difficulties aren’t there yet although Bruce is apparently anxious to bring it about. Complaining about an 800 billion stimulus is one thing but what of the six times that amount that have been added to the national debt over the past eight years when there was absolutely no need whatever to do it. There is now a very real need.
” austincompany Says:
February 18th, 2009 at 8:13 am
Great plan Barry – but you are pissing in the wind. Since the nation elected Democrats to run the country, what we will see today is victimology at its best. All homeowners are terrible victims of greedy bankers and corrupt mortgage brokers and must be saved – at any cost. So the “plan” will (re)introduce a variety of ways to keep underwater homeowners and those that cannot afford their homes in those very homes.
Remember what a great man once said, “Government exists to protect us from each other. Where government has gone beyond its limits is in deciding to protect us from ourselves.” – Ronald Reagan.”
……Did I miss something here or didn’t the recently departed Republican admin and the Fed put about 1.8 trillion into the economy to prop up banks and car companies, nationalize insurance companies, and curtail home foreclosures. Was I imagining all this or is austincompany suffering from selective amnesia which seem to be reaching epidemic proportions in some quarters.
February 18th, 2009 at 9:06 am
I am troubled with this line of thinking.
Saying that we should let prices fall will only continue to make things worse. As prices of housing fall around the people who are current and can afford their homes, how stupid would they be to stay in a home that is 30% more than the foreclosure next door or down the street. I’m thinking they (government and banks) would have to modify all loans in the last 5 yrs to stop the cascade.
February 18th, 2009 at 9:12 am
@Otto:
It is not that the economy is in bad shape that is the crux of my missive…it is that by not allowing some contraction to take place after decades of overspending that the indebtedness that will ensue will make life more difficult for future generations…that is why this is a grand experiment..
I think now that we are in the drought, we are probably poisoning the well for the future with the debt load…
I wait with interest to see where it all leads…one thing is for sure, we’ll find out which of the two grand economic theorists was right..
February 18th, 2009 at 9:29 am
I highly recommend a short post called “The Audacity of doing nothing.”
http://blogs.law.harvard.edu/philg/2009/02/11/the-audacity-of-doing-nothing/
I also thought this post about the American Securitization Forum was interesting:
http://blogs.law.harvard.edu/philg/2009/02/13/american-securitization-forum/
February 18th, 2009 at 9:31 am
> Saying that we should let prices fall will only continue to make things worse.
I admit I don’t understand this line of thinking. Except for the last decade, incomes were where people got the money to pay the rent/mortgage… and that drove house prices. This last decades’ experiment in loaning out money independent of the ability to pay it back is what drove prices up. That isn’t turning out so well. What other idea do you have for supporting prices?
February 18th, 2009 at 9:32 am
We also need to learn to be honest as a society. We need to realize that most ‘home bailout’ proposals are really ‘loan bailout’ proposals in disguise. Their real purpose being to continue to keep MBS, and loan as performing assets, thus to keep the owners of the loans solvent. Just exactly how much transfer of wealth from the poor to the rich can occur before the dynamical system that is the economy transits into a completely different domain, one of extreme wealth, and extreme poverty and naught in between?
February 18th, 2009 at 9:59 am
I wrote this above too — Obama said today: “By bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”
Why should housing prices be “shored up”?
February 18th, 2009 at 9:59 am
“To my mind, the greatest tyrant of the 20th/21st century will go down as John Maynard Keynes.”
Reply:
And to think, Keynes said that in the long run we are all dead. Apparently he didn’t even get that right, as we keep digging up his tired old ideas, long after his demise.
“These people seem to forget that the main reason for 1929-1932 depression was Government’s inability to stimulate the economy. Only after FDR implemented his “New Deal” did the US economy rebound.”
Reply:
A) The Great Depression is generally considered to have lasted until the start of WWII–employment and output did not return to pre-Depression levels until the US entered the war.
B) There are many reasons for the Great Depression, but in ‘29-’32, the government was barely even attempting to stimulate the economy. Hoover was still president and did a few things that might be considered stimulative, but not much. Roosevelt’s New Deal was Keynesianism in action, and the economy recovered somewhat between ‘33 and ‘37, when it plunged right back into what would be a decade-long funk. Again, WWII pulled us out of the funk for good.
Keynes didn’t include war as a proposed stimulus program. He might have been more effective had he done so. Then he could have altered his view of life–even if in the long run we are all dead, in the short run a great many will have to die.
February 18th, 2009 at 10:07 am
Systemic risk. It’s a damned if you do, damned if you don’t scenario.
February 18th, 2009 at 10:24 am
To Boomer:
I stopped reading the blog post as soon as I got to the part where he said “I spent some time with people with a few trillion to invest.”
We have had 8 years of policymaking by “people with a few trillion to invest” and look where it got us. Clearly, it’s time to value brains and devotion to country over the ability to make money.
February 18th, 2009 at 10:24 am
Barry,
Can you expand on a few of your ideas?
“Make the interest-free balloon loans tax free also” – make them tax free to whom?
“Allow the lenders to set aside these loans without taking any markdown immediately” – why is this a good idea? One of the biggest current problems is the lack of transparency on bank asset values and hence investor skepticism about the bank’s health. This would seem to only compound that problem. If the govt wishes to provide a carrot to the banks to effect this type of loan modification, a TARP-like capital injection equivalent to some fraction of this balloon piece is a much more appropriate policy. This would also have the benefit of exposing what the true cost of this type of program is as opposed to virtually all proposals to date which have obfuscation of asset values as a key flaw (or, from the perspective of those proposing them, obfuscation was the key feature).
February 18th, 2009 at 10:53 am
Bruce in Tn Says:
February 18th, 2009 at 9:12 am
@Otto:
It is not that the economy is in bad shape that is the crux of my missive…it is that by not allowing some contraction to take place
……Er a substantial contraction is actually taking place……In macro US terms it’s going be of the order of $2-3 trillion in lost growth. In micro terms the auto industry has lost 40% of its volume.
“A) The Great Depression is generally considered to have lasted until the start of WWII–employment and output did not return to pre-Depression levels until the US entered the war.”
…..Actually GNP recovdered to ‘29 levels by 1936 levelled of in 37/38 when FDR cut govt spending and then resumed the climb in 1939. I couldn’t embed the graph illustrating this but I can assure you it is accurate…..On employment when he took office in March 1933 it was a whisker below 25% and he got it back down to around 14% excluding relief works like WPA but if you do the figure was around 9.5%. In 1937 it rose again to 19.5% again excluding relief works but the figure was around 14% if you do. The war yhe biggest stimulus of all as you point out brought it all to an end thus proving that Keynes’ theories weren’t far off the mark.
February 18th, 2009 at 11:00 am
Nobody wants forclosures but that is the situation we are in.
The imporant thing to watch and to promote is the purchases of forclosed homes. The movement of assets from weak hand to strong hands.
February 18th, 2009 at 11:05 am
I concur with your post Barry, but since when will politicans make policies by recognizing “several truths”?
Obama and the Democrats won by convincing a majority of voters they’re victims. My patriotism wanes everyday as I begin to understand The Responsible are now responsible for the irresponsible. Read Obama’s speeches carefully. That’s his definition of personal responsibility.
God forbid if the irresponsible need to downscale to a smaller house or apartment. That wouldn’t be fair.
February 18th, 2009 at 11:29 am
Barry:
I think your premise that “Home owers (No equity, 100%+ debt) who are in houses they cannot afford are going to have to move to homes or apartments they can afford” is incorrect and misleading, because it assumes that properties in this category are worth what the mortgage is and, thus, it is in the interest of the bank to foreclose, sell the property, and not have a loss. If this was the case, banks would not have solvency problems.
It should be modified to read, in short:
“Home owers who are in houses that are worth a fraction of the mortgage will stop paying the mortgage unless banks agree to a loan modification.”
February 18th, 2009 at 11:34 am
@Otto:
“it is that by not allowing some contraction to take place “…
this is where we will continue to disagree…contraction, frankly a long term healthy contraction has to occur…the government, by fighting this tooth and nail, will make it worse. Much.
February 18th, 2009 at 11:36 am
There is a saying that: If you owe the bank $100,000 the bank owns you. If you owe the bank $1,000,000,000 you own the bank. I think the later is the case. It is in the best interest of the bank to modify loans in order to mitigate its losses. I suspect just want to get $ from the gov’t for doing what is in their best interest.
February 18th, 2009 at 12:53 pm
Completely flawed plan.
As usual , the administration tries to take the easy way out … are they using Bush’s game plan ?????
idiots
February 18th, 2009 at 12:59 pm
I have a very big problem with this statement
“• Home owers (No equity, 100%+ debt) who are in houses they cannot afford are going to have to move to homes or apartments they can afford;”
No, many of these home owners are in houses they could afford, if these houses had their price corrected to non-bubble standards. I know there are lots of speculators and people who really did get McMansions they didn’t need, but a lot of people were buying their first home, having to move to a new area, or accomodating a growing family and needed to buy a house; they had no choice but to buy into the market that the speculators had ruined with ridiculously high home prices. To get into these houses they had little choice but to use the insane mortgage terms that were available, and hope for the best.
These people who are upside down or laid off will face an enourmous financial stigma for the rest of their lives if they are foreclosed upon, declare bankruptcy, or hand their keys back. They may also face an impossible financial burden if they are left to “free market” forces and the predation that banks and other financial institutions inflict upon people on the edge in this country.
These people need mortgage relief, and don’t deserve to be punished for having the misfortune to not be rich in a system designed by and for the rich.
It is unfair to the average American taxpayer, to be certain. That is why the average taxpayer should not be asked to finance this. We need a very high tax rate for the top 1% of this country (like 45%-50%), until this crisis is managed and paid for. That puts the burden where it squarely belongs, on the “captains” who drunkenly steered this tanker on the reef.
February 18th, 2009 at 1:26 pm
I say bite the bullet and nationalize the banks – it’s going to have to happen anyway, what with credit cards and commercial real estate loans defaulting – and claw back whatever money the bank executives still possess. Don’t stop foreclosing on bad mortgage loans but use the bank and some taxpayer money to hire unemployed construction workers to maintain the bank-owned homes. Hire unemployed real estate agents to manage the homes as rental properties. Rent the houses out to the same folks who live in them now. Spin off the now highly regulated banks once their balance sheets have stabilized. Sell the houses to people who can actually afford them at realistic prices.
And, yeah, I completely agree with Mysticdog – tax the very rich at %50 and institute an 80% estate tax for anyone with an estate of more than $5M. Those are the folks who were running the economy when it crumbled so let them pay for putting it back together. Where are they going to go to escape taxes – Russia?
February 18th, 2009 at 1:30 pm
@Mysticdog: I’m with you here. Best idea I’ve heard in weeks, but alas, it probably won’t happen. I would even argue that 40-50% for the top tier is far too low. I’m with you though and said as much earlier today on this blog:
Hate to say it, but I think it’s time to tax the hell out of people like Stanford, Madoff, Wall Street execs who have such uber-wealth again. I’m starting to think we need to assume that most of these folks did something unseemly (in many cases a lot of unseemly, even illegal, acts) in their lives to accumulate such wealth. It’s hard for me to shake that nagging thought as these frauds are uncovered.
February 18th, 2009 at 5:14 pm
Mysticdog,
You wrote several things that suggest entitlement or victim mentality and certainly not being responsible or accepting consequences of one’s actions.
“a lot of people … needed to buy a house” — Nobody NEEDS to buy a house. Rental properties are available. Owning a house is NOT an entitlement.
“they had no choice but to buy into the market that the speculators had ruined with ridiculously high home prices” – Nobody ever has NO CHOICE about buying a house. Buying a house with a RIDICULOUSLY HIGH price that they presumably can not afford is making an extremely poor irrational choice. In the process this action reinforces the speculators and in so doing THEY are speculators. These people are NOT victims of speculators.
“To get into these houses they had little choice but to use the insane mortgage terms that were available, and hope for the best.” — Nobody ever has LITTLE CHOICE about mortgage terms since they can choose to rent or move elsewhere. Nobody should ever make a major purchase (house, investment, etc.) based on HOPE FOR THE BEST. Unless someone defrauded them, these people are NOT victims of mortgage brokers.
“These people who are upside down or laid off will face an enourmous [sic] financial stigma for the rest of their lives if they are foreclosed upon, declare bankruptcy, or hand their keys back.” – Maybe not, at least after a few years. But even if they do, this is the risk THEY took by buying an unaffordable house on unaffordable terms. Like most of us, they have to be responsible and accept the consequences of THEIR actions.
“They may also face an impossible financial burden if they are left to “free market” forces and the predation that banks and other financial institutions inflict upon people on the edge in this country.” – Americans have a CHOICE about what they buy, when they buy, and with whom they transact. Unless defrauded, they are NOT victims of banks and other institutions.
“These people need mortgage relief, and don’t deserve to be punished for having the misfortune to not be rich in a system designed by and for the rich.” – Nobody is PUNISHED for not being rich. Like most of us, they have to be responsible and accept the consequences of THEIR actions. There is no grand conspiracy.
Your diatribe is wrong. The current situation exists because many people made extremely poor choices, often under the delusion that they are entitled to prosperity and an easy life. All of us should save for the future, prepare for the inevitable downturn in the economy (yes, such periods are NORMAL), live only within our means, be grateful for what we have and not succumb to greed or envy of others, and live a life commensurate with the honest value we provide in the work we do.
February 18th, 2009 at 7:22 pm
Declare 28-36 Debt-to-Income [DTI] Qualifications to underwrite mortgages in default which facilitate mark-to-market holdings for Financial Institutions. Those homeowners who cannot qualify for at least 75% of what they originally borrowed under 28-36 DTI, sign Deeds-in-lieu of Foreclosure for lease-purchase agreements with note holder(s) at fair market rent and purchase rights at market value (market value is based on others in market who can qualify under 28-36 DTI) today. Qualify the loans and the real estate market and values settle out while credit and trust are restored in mortgage backed securities producing financial market stabilization. The 25% write down is backed by the U.S. Government. This 25% is substantially less than the bail-outs to date. Banks and servicing agents are already in place to grasp the underwriting and non-performing loans become qualified so values are validated. This entire process could take 18-24 months but with immediate impact as this plan is less costly.
I may be the only one in the world who ever purchased his own mortgage at a deep discount and then sold the collateral for significant gain. I’ve learned one thing: He who controls the debt, controls the equity. We have to go back and underwrite what was not done the first time around. Simple. The accountability is back in the marketplace and credit markets restored.
February 18th, 2009 at 7:29 pm
I think the last 8 years of corporate bailouts and deregulation has proven ineffective. This plan starts to get to the root of the problem and to help Main Street instead of Wall Street (remember that idea?). There seems to be a lot of smart if not snarky commenters here who don’t seem to get it.
Obama’s plan is a strong step toward stabilization and keeping people in their homes.
http://www.defendyourdollars.org/2009/02/obamas_foreclosure_plan.html
February 18th, 2009 at 7:51 pm
Interesting plan Barry, but there a few things you missed. You offered to make a Interest Free Balloon Second for the Neg Equity. What you failed to discuss was if the homeowner already has a Second. Does the current Second move into Third position? If so you might as well wipe it out because it will never be paid. Or Does the First Lien Holder’s new Second move to Third position? Even in this scenario the chances of it getting paid are remote at best.
What needs to be done is the Current Mortgage on a property need to be re-written down to the current appraised value of the home, this will elimante any Negative Equity and remove the stima of the ‘Tenant Owner.’ The Banks need to recognize the loss or sell the Note to the Fed Govt at no more than 50% of the face value. If the Banks fail then they fail, they are being artifically propped up by unrealistic Note values of homes that are under water, and billions of TARP funds that need to given back. Once the loan values are written down or sold to the Fed Govt, the homeowner gets a restructured loan based on thier current income, not last years income or 2007s income, CURRENT INCOME. The borrowers are qualified at whatever Rate they need, regardles of if it is at 1%,2%3% etc. If the homeowner can make a payment then that is the Rate their Note should be at, for at least 5 years. After 5 years the Note would gradually increase by 1% per year to the current 30 year fixed Rate. This timeline will give the market, homeowner, and Nation time to recover and stabilize.
For those of you who think this is a ‘bailout’ for homeowners who bit off more than they could chew or are upset their equity will disappear if the Notes are written down, keep this in mind. First, your home is only worth as much as the closest match model is currently being sold for, so any imaginary equity you thought you had is now gone. The only way to get it back is to prevent future foreclosures, create demand for new buyers, and allow the housing market to come back. Second, after the Great Depression homeownership continued to fall until after WWII when the Fed Govt offered low income housing for the returning GIs, if it were not for Fed Govt plans like that the American People would still feel the American Drean is unattainable and be forced to Rent for their entire life. I personally am not in a position to let ideology die, it is what makes our Country the best in the World. The ability to work hard, do your part, and be able to be proud of who you are, what you do, and where you live. Lastly, remember 2/3 of GDP is consumer spending. Without us the economy will never recover, so until people feel they are secure in their job and their home they will not go out a buy anything.
Just an a FYI I wrote a proposal detailing all of this information and sent it to Fed Chief Bernanke, Housing Chairman Barney Frank, Banking Chairman Chris Dodd, Pres. Bush, and Tres. Sec Paulson back in July 2007 before all of this chaos happen, warning them of what was coming down the pike. The only one to respond was The Federal Reserve, and they felt the problem was well in hand. Good Call Ben!
February 18th, 2009 at 10:40 pm
Barry, you are 100% correct, but please consider the other side.
Since the Obama administration is going to try to put a floor under home prices through the use of lower mortgage rates and principal reduction, and they seem to be supporting auto prices through bailouts of GM and Chrysler, why not put price floors under other products?
I hate to see oil fall below $150 and gasoline fall below $4.50-$5. Gas should remain above $5, or more.
Obama should come up with a program to put a price floor under all commodities. A price support of potash and other farm products would help keep food prices up.
Obama can create taxpayer supported programs for every product sold in the USA. I have many ideas for price levels, but I’m certain that Obama has even more great ideas to keep prices from falling to affordable levels.
Obama, keep up the great work!
February 18th, 2009 at 11:56 pm
The housing market is not correcting or returning to normal prices itself, it is decreasing in direct relation to the massive influx of foreclosures that were discounted to sell quickly, with the banks full prior knowledge that their actions of discounting (underselling) their massive inventory of Reo’s WOULD lower property values financially harming their other EXISTING customers.
There is 12.1 Trillion Dollars in outstanding mortgages of which 25% are approximately underwater
( have negative equity) Roughly that equals 3 Trillion Dollars, if a estimated 40% principal reduction was given to match the current appraised value, the cost to cure housing would be 1.2 Trillion Dollars.
A government mandate is needed to enforce the Recall, Reduction to appraised value and Replacement of all DEFECTIVE mortgages at the mortgage holders loss/cost/expense, CAPITALISM.
The band aid methods that are being put forth will not stablize nor help, if homeowners are still left financially harmed thru no fault of their own.
1-A homeowner who is current with their payments but has negative equity is automatically entitled to a principal reduction to appraised value. ( an appraisal that includes 2 Reo’s as comparables) at 5.5% FRM
There is no appreciation profit obtained for 5 yrs if current, and if delinquent 7 yrs.
2-A homeowner who is delinquent with their payments and has negative equity is also entitled to the principal reduction to appraised value SUBJECT to sufficient income to qualify at 33/41% ratios with the interest rate of 6.5% If they can’t or don”t qualify, the home is foreclosed whether it is due to job loss or they never should have bought the home to begin with. The “former owner” will be allowed to reside in the home until sold or up to 1 yr at a month to month tenancy paying rent, avoids having vacant/abandon homes.
3-All homeowners who are current and have equity or are equal to the current appraised value are entitled to an automatic refinance at the interest rate of 4.5%-5% ( higher rate for LTV’s over 80%)
4-First time homebuyers subject to standard underwriting guidelines are entitled to a 4% FRM.
5- The foreclosed homes would be sold to the public at the current appraised prices, if needed a government subsidy could be given to first time homebuyers in the form of a forgiveable grant for 10 years.
To sweeten the mandate, any dollar amount of loss involved in the Mandate by the investor or bank would be allowed to be multiplied by 3 for balance sheet/tax purposes.
The above was also sent to every Senator, FDIC and President Obama as a way to stimulate the economy with increased public spending power without harming more homeowners.