1/30/2012
Isn’t It Time To Actually Solve The Housing Crisis?
For more than a year various individuals have been trying to explain to the world how the “Housing Crisis” happened and what might be done about it. For the most part, the explanation about how the “crisis” happened has been covered extensively.
You can choose your most likely villain:
A) A lot of “bad people” working in the mortgage origination field convinced unsophisticated borrowers that they could get a mortgage without any trouble if they just filled out a few innocuous forms; perhaps they had to embellish the truth a little, but everyone was doing it;
B) a lot of “bad mortgage/banking folks” gathered up their toxic mortgages and “sold” them to unsophisticated investors who bought them without knowing what they were buying;
C) The premier rating agencies of the world of finance knew what was going on, but they looked the other way and gave the bundled mortgage portfolios wonderful, class A (or better) investment ratings. This, in turn, convinced everyone that “bad investments” were really golden opportunities to make money in the long run;
D) The semi-public bundler’s of mortgages (Fannie and Freddie), in collusion with their friends in the banking industry, knew what they were doing, but continued to purchase packages of “bad mortgages” because if they didn’t, local banks would have no money to lend to local borrowers, an event which could shut down local industry; or,
E) The Federal Government demanded that banks make bad loan decisions and lend to people with bad- or no-credit because it wanted to force banks to demonstrate a greater openness to lending to minorities or other groups who might have had credit denied to them in the past, whether because of race concerns or other untoward discriminatory behavior.
F) A combination of any or all of the above.
Perhaps you might even believe that more than one of these scenarios is the truest source of our collective pain. At this point, it almost doesn’t matter what you believe to be the most significant causal factor: the “Housing Crisis” is here, and it continues to devastate our national economy. What the government has offered up to this point in time has benefited too few of those “under water” or on the brink of foreclosure to matter much.
What I propose in this white paper is a way out of the problem.
For some, my proposal may be viewed a too simplistic, but it is cost effective and it will work.
Fannie Mae and Freddie Mac have been given an infusion of public money to the tune of something over $110 Billion, or possibly as much as $400 Billion depending on how one views the unique accounting methods being used. Whatever figure you desire to use it is too much and most likely not effective to resolve the major difficulty we all face in order to get our economy back on the right track. The real point is that we the taxpayers of America shouldn’t be putting any amount of new money into perpetuating nationalized institutions which have failed us, and which, apparently, haven’t a clue how to get us out of our dilemma.
There are far too many hardworking individuals who have played by the rules and now find themselves in the predicament that no one can or wants to help them. People I know who strongly desire to find a way out, can’t because their homes are now worth less in today’s market than what they owe on their mortgages. This can and should be corrected.
My solution is to allow homeowners to refinance their mortgage to a lower interest rate
Regardless of the current market value of their property. Present “guidelines” forbid this, but that is taking a backward thinking approach to the problem.
This may sound like radical thinking to some, but a lesser (smaller) version of this concept is already in practice and authorized by the Federal Housing Authority (FHA).of the Housing and Urban Development Agency (HUD).
Let’s have some fun with numbers:
According to Ris Media, 64 to 67% of Americans have a mortgage allowing them to own their own home; let’s just use 60% to make things simple.
Some media outlets claim that there are 11.1 Million mortgage loans that are “upside down” — those people owe more on their mortgage than their home is currently worth. Again, to keep it simple, let’s chop that number down to 10 Million.
According to the Kansas City Federal Reserve Bank, the average loan amount is $181,225.
Since the operators of the Federal Reserve are always correct, let’s leave that number alone.
Now, let’s explode these numbers into what I see as the real world of troubled home mortgages.
Take the average loan amount due ($181,225) with an average interest rate of 5.5% which produces a monthly payment of $1,028.98. If we could realistically lower that interest rate to 4.5%, that would lower the required monthly payment to $918.24; a monthly savings of $110.74. There isn’t a homeowner around who wouldn’t enjoy an extra $110.00 per month to handle all of the other expenses that we all have to grapple with. But, the power of this small adjustment becomes gigantic when you apply that interest rate reduction toward the 10 Million homes/mortgages that could be eligible. That would be a monthly saving of $1,107,400,000 or $13.288 BILLION in just one year. Think of what an infusion of $13 BILLION could do to our stagnant economy!
Such a small change in an interest rate could be the gift that keeps on giving, month after month, and year after year. If the normal life span of a mortgage loan runs somewhere between 7 and 10 years, the impact on the national economy would be almost beyond belief.
All of that wishful thinking makes sense to me, but a cynic might ask: “Isn’t there a cost to reducing everyone’s home loan interest rate?” The answer is, not really. The public already owns both Freddie and Fannie Mae. Wouldn’t banks lose? Yes, some banks that hold the original mortgages or even mortgage backed securities would see a reduction in their projected earnings, but so what? Taxpayers have already ponied-up trillions to the biggest American banks as a big public “hug” to keep them solvent. They were “Too big to fail” and it’s time that we all pay attention to those among us who are too small to let fail as well. I also happen to think that the banks would be OK with the plan if Fannie and Freddie agree to stop suing them over the same loans.
Are there details to be worked out? Of course, but this is a program that could add immensely to the overall economy without adding to the debt of the nation. The redone loans could be offered in somewhat shorter periods than the original 30 year standard — say 20 or 15 year periods. And, shortening the payback period would also save the borrower money in the longer term.
This proposal would “cost” banks around $5 Billion for the first year, in less interest income. Without spending a lot of time running through some esoteric number crunching (which can be shown through an email to anyone interested), let’s just say that because there is a lower interest rate on each loan, there would be a higher percentage of each monthly mortgage payment applied toward principal repayment and a correspondingly smaller amount applied toward interest on the borrowed amount. The difference in principal repayment (on those average outstanding loans I referenced in the opening of this paper) amounts to slightly more than $41.00 per month per loan. Once again, referencing that estimated 10 million outstanding mortgage loans that would come to around $4.1 Billion in the first year of greater principal repayment.
Because there would be more principal repaid each month (and less interest paid), I’ve rounded up to a projected loss to banks of $5 Billion in projected earnings. Let’s remember, this kind of a program is designed to also SAVE existing mortgages and allow people to not go into default thereby saving banks millions in charges they would have to pay to go into the Short Sale or Foreclosure route.
Adoption of this program would help people stay in their homes, alleviate family stress, stabilize neighborhoods, accelerate overall payment of loans (to further assist banks), and go a long way toward returning the pride of home ownership to responsible borrowers. This is a programmatic change that brings a WIN-Win to all concerned.
In my next white paper I want to take on the subject of how my proposal compares to what the government has already attempted to implement in the HARP legislation, with extremely poor results. If you’ve read this far, I bet you can’t wait for the next installment.
Isn’t It Time To Actually Solve The Housing Crisis? Part 2
In my first white paper I made the argument that a small mandated change in the interest rate of 10 Million outstanding mortgages could collectively save American homeowners over $13.288 BILLION per year for each of the next 7 to 10 years.
I also described how the cost to the banking industry of such a change in interest being charged on outstanding mortgage loans could be less than severe, and even negligible when balanced against the anticipated real costs of legal and personnel expenses involved in Short Sale losses and Foreclosure filings.
But, just to bring everyone up to speed, I proposed a 1.0% refinance of the interest rate on 10 million outstanding mortgage loans. From there I showed how such a cut in interest rates would help people stay in their homes, alleviate family stress, stabilize neighborhoods, accelerate overall payment of loans (to further assist banks), and go a long way toward returning the pride of home ownership to responsible borrowers. This is a programmatic change that brings a WIN-Win to all concerned. (For those who missed the first part of this proposal and want to read all the specifics, I ask you to go to www.letmerefi.com where it can be found.)
In this continuation, I want to deal with the touchy topic of present home values. We all know that “The Housing Crisis” has had devastating impacts on our neighborhoods — whether those neighborhood are full of expensive homes or more common, average homes. The force of that impact has been shown to be reduced valuations for all homes in each neighborhood on a relative basis. This is true whether there are any individually impacted homes in a particular neighborhood or not. Just the presence of a Short Sale home or a Foreclosed home down the block or around the corner has had an even greater impact on the values of the remaining homes than under “normal” circumstances. Home values are down everywhere; it’s only the percentage of decline that is at issue.
When the Federal government blundered into this thicket, they mandated that these reduced home valuations would have to be factored into any mortgage refinancing. That is, if you purchased a home valued at $220,000 and currently owed $200,000 on your mortgage, and your home was determined to have a current value of only $180,000, you would be unable to refinance your loan to the $200,000 you owed your mortgage holder. Even though most of the professionals involved in the home ownership profession know that the value of a major fixed asset of a home will improve over time, you wouldn’t be allowed to refinance to an amount “above” current value. This has been decreed by both Fannie Mae and Freddie Mac, and we all know how prudent they have been.
What I propose is to allow homeowners to refinance their outstanding mortgage debt without regard to present value. Of course, I’m not talking about homes that have been significantly abused, trashed, gutted or otherwise mistreated; I’m talking here about homes that have been responsibly well cared for, kept up to date, and been in responsible ownership. If we could get Freddie and Fannie to buy into this concept we could even set an annual limit of the total value of loans which these agencies would “guarantee” when refinancing below current market value. Say we set that allowed lending capacity at $1 Trillion, and then reduce the authority annually by the value of the refinanced underwater mortgages they accept; if they guarantee loans in the first year of $200 Billion, the maximum authority drops from $1 Trillion by that $200 Billion, permanently reducing the lending ability of Fannie and Freddie.
Further, I propose that all this refinanced mortgage debt permitted below current valuation be purchased by the Federal Reserve Bank should there not be an open market for the debt certificates. If Freddie and Fannie can do it, that’s great; if they can’t, bring in the Federal Reserve System since they have already purchased mortgage backed securities.
Now, for some specifics: I would
–Allow any mortgage loan that has been paid on time in each of the preceding 12 months from the date of the owner’s application to join the program to refinance, regardless of any present valuation of the property (responsible ownership presumed);
–If 18 months of payments have been made on time, allow first and second mortgage amounts to be combined into the new refinanced loan (the second lien holder in a combined loan would retain a proportionate share of the credit risk);
–Any loans having a pre-existing second mortgage amount would be limited to a 29 or lesser year repayment schedule;
–All loans with a zero or a negative equity valuation would be limited to a 29 or lesser year repayment schedule;
–Any loans having a 25, 20, or 15 year repayment schedule would be designed with “rewards” built into the refinancing — such as lower initial interest rates or fees.
The goal of the program I propose is to allow for the responsible retirement of mortgage debt, not to forgive freely adopted commitments. The goal of responsible public policy should not reward, punish or encourage.
For banks and other mortgage holders, all discharged mortgage debt created through refinancing should be treated as federal tax credit, dollar for dollar to the amount credited.
This will be a program that will unlock the housing market. No more responsible home owners “under water”. No more neighborhoods devastated with numerous homes vacant, vandalized, or worse, because families are forced to give up the homestead. No more homeowners who cannot move to where a job might be because they can’t sell their current home because they owe more than its current value. The refinancing I have proposed will permit homeowners who must move to find new employment to assign a more realistic value to the cost of renting their present home to someone who could not afford to buy that home.
Renters will benefit since a new supply of properties can offer them the benefits of home occupancy. Homeowners allowed to responsibly refinance will be discouraged from walking away from their debt obligations, and that, in turn, will lower the numbers of Short Sale or Foreclosure properties. And that, in itself, will help stabilize home prices since there will be fewer “distressed properties” in any neighborhood to further drive down home values.
Further, if legislation is enacted to push Freddie and Fannie into being guarantors of this program, this could lead to a permanent reduction in the amount of debt these institutions can hold, which has been a stated goal of members of both political parties.
This is a program that can pull the country out of the housing crises it currently faces. It is a program that can reach into as much as 60% of the nation’s housing stock. It’s deficit neutral. And, it’s responsible. It should be considered by anyone seriously interested in helping the majority of homeowners in America, and by extension the majority of Americans.
Andrew G. Palomo
