The MGH Report

Michael G. Haran, Proprietor


Posted by on Oct 25, 2008

Since most agree that the foundation of our economy is housing it is housing that needs to be stabilized or little else will work. Davis Moffett and Herbert Allison (Fannie Mae/Freddie Mac) have called for suggestions on how to work out this current housing crisis. The Treasury Department has been working on finding ways to slow down foreclosures and help people stay in their homes.

FDIC Chairwoman Sheila Bair recently said that the $700 billion rescue package included authority to offer government loan guarantees and other incentives as a way to encourage banks and mortgage lenders “to prevent avoidable foreclosures.”  She said that the recent extensive rescue strategies need to do more to get at the millions of homeowners who are headed for potential default and foreclosure even if it means the Treasury absorbing losses on defaulted mortgages.

Neel Kashkari, the interim assistant secretary for financial stability who’s in charge of the rescue effort said that the Treasury is still in the “policy process.” To which Senator Dodd (D-Conn) responded that the Treasury “needs to get this moving.”

Urgency is the issue. Dodd referenced “10,000 foreclosures per day” and it’s estimated that over 10 million more homeowners will have zero or negative equity by June of 2009.

The Treasury’s new HOPE for Homeowners (H4H) program was put into law this summer. Its purpose is to keep homeowner from mortgage default and foreclosure. Lenders who voluntarily allow borrowers to refinance under this program are required to reduce the size of the mortgage to no more that 90% of the home’s current appraised value. For allowing the mortgage writedown, the government goes 50/50 with the homeowner regarding future appreciation.

The FHA can insure up to $300 billion of these new loans and it’s estimated that 400,000 homeowners could avoid foreclosure.

Some industry experts think that this program is a bad deal for the homeowner but, if you think about it, it’s nothing more than the homeowner going partners with uncle Louie but in this case it’s Uncle Sam. A lot of homeowners get started with the help of older relatives who put up the down payment with the homeowner partner making the payments. When the property is sold they split the profit.

In and of itself I don’t think this is such a bad deal considering it allows the homeowner to stay in their homes a with a 30-year fixed rate mortgage that they can afford. My problem with this program is two fold.

First, the government posts an instant loss and second, the problem isn’t really solved if the property continues to decline in value.

What I think would be a better program, or at least an alternative to the H4H program, would be to keep the homeowner’s existing mortgage in place but rewrite the homeowner’s payment at no more that the traditional 30% of their income. The home owner retains ownership of their home and can use the other 70% of their income to buy consumer goods and services, save for college or put into retirement accounts. This would be an instant infusion of money into the retail sector specifically and the overall economy in general. Once the home regains enough equity for the homeowner to sell or refinance, the governments would get the original mortgage principal paid off and the homeowner would get the equity above that which is what they expected when they bought the house.

With this program it doesn’t matter if the home values continue to decline because eventually, when the market comes back through both lack of supply and population growth, the government will get the original mortgage amount paid back.

Now granted, if the homeowner has to move and can’t afford to keep the house, they will have no choice but to give the house up. But if the homeowner could rent the property the debt would be continued to be serviced. Plus, foreclosures can still happen with the FHA mortgage. These mortgages would be 30-year fixed loans with no negative amortization.

One of the features of the H4H mortgage is that FHA charges the home owner a 3% mortgage insurance premium to initiate the new loan. This not only sounds like “stepping over a dollar to pick up a dime” but also the old way of doing business.

The fine points would still have to be worked out but the best part of a loan program like this would be that it could be done quickly. No appraisals are needed and the boost to the economy would be immediate.

The times call for innovative programs to stabilize the nation’s housing market. If we fail another possible 10 million foreclosures loom on the horizon. Until we get to the bottom of this market nothing will work – including us.

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Posted by on Oct 21, 2008

As the saying goes, “It’s all about housing, stupid.” Now that we know the problem; have pointed the appropriate fingers; and gotten the financial pledge for enough money to straighten this mess out – what’s first?

It doesn’t matter whether we (U.S. citizens) buy the bad real estate mortgages from bank portfolios and/or Wall Street securities packages or buy preferential stock in the nation’s banks. Either way we will have an equity stake and will get paid back once banks regain profitability. What matters is how this cash infusion is used to stabilize the most fundamental aspect of our financial system – the U.S. housing industry.

The market crash of 1929 was also fueled by sharply rising housing prices. When the bubble burst the over leveraged economy came crumbling down. It’s much different today as our economy is much more developed and we are a lot richer. Then, the feds thought that the best way to go was to allow the system to “self purge” by letting the financial industry deteriorate. This time the feds are all over this as are the world’s banks.

Since two thirds of our economy is driven by retail sales it is imperative that we get our consumer units functioning or the stock market will take forever to recover. Just as the housing market overbuilt because of the availability of subprime loans, the retail sector was greatly over expanded by people spending money from their home’s artificial appreciation.

Over the past 30 years a normal U.S. housing cycle ran about five years. Home prices would go along and then shoot up as the population grew before builders could satisfy the new demand. Once the supply caught up and demand waned, prices would adjust downward and then stabilize. They normally stabilized above the prices when the cycle started so everyone made money. That difference between the home prices at the start of the cycle and the new stabilized price was the new equity consumers had to spend, invest, or just leave in the house to create wealth. Since this revenue source no long exists the economy is contract accordingly.

Normally, population growth would grow us out of this problem. In California the current population of 38 million is expect to grow by 1.1 million by 2010. Considering a household population of 2.94 people we will need about 366,000 new housing units to house this growth. However, that’s an issue for the next real estate cycle and, anyway, we don’t have time to wait.

When the dotcom bust drained a couple of trillion dollars from the economy, the country found a new growth engine – unfortunately it was the housing industry. This is why we need not only a jobs stimulus package to replace this contraction’s employment declines but also a huge investment in alternative energy which will have the duel benefit of creating thousands of jobs and helping get us off oil.

If consumers don’t have a stable housing situation with a perceived upside, they’re not going to spend. If we ever want to see any growth in the U.S. again we have to get to the bottom of this housing market a.s.a.p.

According to, an internet provider of home valuation, reports as of August ’08 one three of the homeowners who bought in the last five years owe more on their mortgages than their homes are worth. The Seattle-based service that offers values for more than 80 million homes continues that almost one-quarter homes sold in the last year were for a loss.

California has the highest number of homeowners with negative equity. In Stockton, Modesto, Merced and Vallejo-Fairfield 90% of homeowners whose mortgages exceed the value of their homes. In Riverside-San Bernardino, Bakersfield, Yuba City, El Centro and Madera, the percentage was more than 80%.

Of the 51.2 million mortgage holders in the U.S. it is estimated that 1.4 million homeowners will lose their homes to foreclosure in 2008 through the first half of ‘09. It is estimated that by the end of this year 10.7 million will have no or negative equity.  That’s 21% and $3 trillion in negative equity. That’s a lot of money to take out of the retail sector.

A little glimmer of a bottom is sticking its nose up from the subprime primordial ooze. National existing home sales surged in August ’08 jumping 7.4 percent over the previous month of July and 8.8% year over year. “What we’re seeing is the momentum of people taking advantage of low home prices, with pending home sales up strongly in California, Nevada, Arizona, Florida, Rhode Island and the Washington D.C. region, “said Lawrence Yun, National Association of Realtors chief economist.

In my neck or the woods (Sonoma County, California) the Santa Rosa Press Democrat, ran an article about a woman who had just purchased a condo for $99,000. This was a bank-owned property that had a mortgage of $245,200 when the bank took it back. Priced at $140,000 when the bank dropped the price to $99,000 she pounced. With a 75% mortgage at, say 6.0% (non-owner rate) her P.I.T.I would be $650. Based on a rental of $1,200 per month (the national median rent is $868 with the median mortgage payment at $1,687) her net would be $650 per month. First time buyers and investors are fueling the current market and that $650 will be going back into the economy (unless she buries it in her backyard but I sure hope we haven’t come to that).

Now the point isn’t that this is a bottom, the point is that THIS property has reached ITS bottom. Valuations are different across the country. Some communities are doing well with Pittsburgh, Oklahoma City and Austin, Texas seeing rising home values. Now what we have to do is get all of those 10.7 million homeowners that are facing zero or negative equity stabilized.

A lot of the money to do this already exists even without the $700 billion rescue package. The Federal Housing Finance Agency, which took over Fannie Mae and Freddie Mac, has lifted capital restrictions and gave them an initial $100 billion to buy more mortgage securities of all types, including those that hold subprime loans.

They say that the reason these mortgage backed securities are hard to sell is because any one issue could contain dozens of levels of investor seniority and different rules for being paid off. The “derivative” part of this was supposed to spread the risk among investors. What it really did was lead to the credit freeze because no investor (bank) wanted to be, just like a classic Ponzi scheme, the last guy in. Richard Dooling said, “The best and brightest geeks Wall Street firms could buy – fed $1 trillion in sub-prime mortgage debt into their super computers, added some derivatives, massaged the arrangements with computer algorithms and – poof! – created $62 trillion in imaginary wealth.”

Well, I’m just a street guy. All I know is that when a piece of real property is used to secure a debt the normal procedure is that a promise to repay is recorded by the county recorder which is commonly known as “a note secured by a deed of trust.” In my simple mind that’s all these mortgage securities are – nothing more than a bunch of notes secured by trust deeds. When a borrower wants to pay off the note, the escrow holder (normally a title company) submits a Payoff Demand to the note holder. As far as I know this is what happens when a borrower needs to payoff a mortgage that is part of a mortgage backed security.

These securities should be pulled apart and held like a portfolio lender would hold their mortgage assets. Once that particular mortgage is either paid off by a refinance or foreclosure the underlying owners of that note would get paid what they are owed. Any loss will be part of this rescue package. The feds could then sell the property and recoup some of the tax payer’s money.

What I propose is that the mortgage servicers (feds, banks, investment banks) adjust rather than foreclose. The qualified homeowner’s mortgage should be adjusted to the same amount that an investor would pay for the home. The homeowner’s new P.I.T.I should be no more than the traditional 30% of their income. In exchange, the bank would take an equity interest in the property as security for the newly reduced mortgage. Once the property appreciates to a value equal to the original mortgage amount the bank would get paid back when the property is either sold or refinanced. This mortgage instrument would be similar to a Reverse Annuity Mortgage in that the bank would take an equity position but in this case the homeowner would continue to make payments.

This would do two things. First it would allow the homeowner to stay in their homes and, since the homeowner’s housing costs would be capped at 30% of their income, the other 60% of their income can be saved in retirement accounts, used to pay off existing consumer debt, saved for college, or spent on consumer goods. This way the homeowner will benefit from the same appreciation that an investor would get and the U.S will get a pay-down of the national debt when the property is refinanced or sold.

The Treasury’s Hope Now Alliance, a government industry group trying to prevent individual mortgage foreclosure or Fannie Mae/Freddie Mac should hire an army of mortgage professionals who can go home-to-home to rate the homeowner’s situation and prequalify them for mortgage adjustments. There are thousands of honest, hardworking licensed mortgage brokers through out the country (I know, I’m one of them) that never dealt with subprime mortgages, that could move swiftly to implement the mortgage relief programs.

I think that we have a good one in assistant treasury secretary Neel Kashkari. He has been selected to head the Treasury’s new Office of Financial Stability. He is young, mutli-disciplined (he is a mathematician, scientist, a Wharton School MBA and I’ll bet he understands algorithms) and the type of thinker (not unlike Obama) that we need desperately right now. He and his team will be implementing the strategy to isolate our financial system’s non-performing assets, oversee a universal devaluation of assets, and stimulate the private and public sectors to create jobs and get our newly regulated system running again.

Our economic system may not be perfect but, as they say, it’s proven to be human friendly and so it will endure. The lessons we are now learning will serve us, and the world well, as we evolve toward a universal financial system. There is a way out. We all have to pull together and never underestimate the resolve of the American people.




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Posted by on Oct 11, 2008

I may be preaching to the choir but a few things need to be said. Electing Barack Obama is crucial now more than ever. We need this man to move our society forward which is, arguably and not discounting the economy, the most important benefit of his election. As president, Obama will have a mandate to re-direct our economy and to re-establish our leadership in the world.

With Obama as president we would again be seen as the leader of the world not just the free world but the whole world. People may not believe this but most people around the world are rooting for us; they want us to win because they want to be us; they look up to us; and why? – Because they are us and we are them. The U.S. melting pot is the model for the world because the world is us. In another 100 years, or whatever, the world will be the United States of the World. This is the real reason for our Muslim confrontations. Their Muslims never went through a renaissance like the European Christens did in the middle of the first Millennium. The governing of the world has to be secular or it won’t work and 1.3 billion people out of the system won’t work.

Our economic/political system is basically designed like a pendulum. Put simplistically when the country needs to rive up its economic engines traditionally the Republicans would lead the charge.  As the pendulum swings to the right jobs and wealth are created as taxes for the wealthy are cut hoping for the questionable “trickle down” to simulate the economy. Inevitably as greed drives too much money into the hands of the wealthy at the expense of the common good, our social safety net begins to fray and our infrastructure begins to deteriorate. As cries of “throw the bums out,” become common the pendulum swings back to the left. The wealthy are taxed and the social fabric is sown. The problem was that this time the Republicans decided that they were above the laws that were put in place to keep the system working and to prevent the exact things that happened. When you put egomaniacs in power bad things happen, like ill-advised wars and the deregulation of Wall Street.

The current economic situation in the U.S. is governed by fear. It is the same fear that dictated the 1929 crash. The difference now is that we have an historical reference. Their have been 10 depressions in the U.S. since WWII and we have not only survived but have prospered after them. Remember, our economy is about in the $14.5 trillion range. We have a large amount of recourses. The closest economy to us is the EU at $10 trillion. We are still the big dog and you never want to bet against the big dog. The deflation which we are now going through is across the board – we’re all going though it. Once re-regulation is back in place equities will come roaring back.

Normally, when one economic growth cycle ends it settles into a relatively stagnant period. The normal real estate cycle is about five year. The market would go along then shoot up and then back off. This back off normally bottomed out above the prices at the start of the cycle so everyone was happy. What happen this time was that there was too much money looking for maximum returns with to few investment opportunities. The housing market was in the boom part of the cycle and all this money wanted to get in on it. The mortgage industry then changed the rules to accommodate this demand with disastrous results.

This deregulation caused an artificial housing boom which built too many houses for an artificial market. If these subprime loans were fixed rate and required people to have real income this problem would never have existed – but they weren’t and so now we are in this mess. Once the ARM loans adjusted the unqualified home owner defaulted. The defaults snowballed and the builders were left holding unsold homes, ergo too much supply for demand which translates to “bust.” Once the ARMs have been replaced with low, 30-year fixed loans and foreclosure prices have reached the “I just can’t pass up this deal” level while at the same time the lack of new construction affects a still growing population, the market will stabilize and homes will again appreciate.

This administration took a traditionally foundation industry and turned it into a giant, deregulated security. If this happened within, say, the hedge fund industry the average person would have never known about it let alone be affected by it. But when a foundation industry, like housing, food or clothing, gets deregulated everyone is affected. This current administration is not only dangerous and greedy they also seem very stupid.

What has to now happen is that to stop the fear the government has to step in and take control of, first, the financial institutions. We (the U.S.) shoul buy all bad debt dollar for dollar and take an equity position in the banks. The U.S. should do this for any bank around the world (the British have already do it with Barclays’ and The Royal Bank of Scotland). This would liquefy the credit markets which will allow the financial markets to start trusting one another and get back to business.

Second, we need a ground up U.S. stimulus package to grow jobs. Did some one say WPA? It worked before and it can work again. The other “project” which pulled us out of the Great Depression was WWII. Well, since in this day and age I doubt another WW would go over very well, we need another “boom” to drive our economy. How about this? Instead of putting all this money into foreign wars and the oil industry we put it into developing a working system of complete energy independence by, say, in ten years.

Now we really don’t know if global warming is completely man made since the earth goes through these warming and cooling trends about every ten thousand years, but since we have the technology to develop clean energy and stop using fossil fuels why on heaven’s earth not do it? We can do solar, wind, nuclear, clean coal, electric and air (the Germans are working on an air compression engine – you know kind of like a BB gun). This would lead to an economic boom every bit as big as the dotcom or housing booms.

The U.S. auto industry is in dire straights. They are now paying for making an inferior product and being blind to the future. Toyota and Honda have long made comfortable, fuel efficient, highway friendly cars that are inexpensive and last for years with minimal repairs while Detroit continues to produce an inferior product with planned obsolesces. You can only thumb your nose at an educated populace for so long until the chickens come home to roost. With the latest U.S. loan to the auto industry we now own a piece of these companies as well. As owners we should direct that Detroit stop sucking at the oil industry’s tit and build energy efficient cars that contain the latest technology regarding fuel efficiency and quality of construction. Why can’t we have a car that uses air as fuel?

We need jobs and we need our infrastructure rebuilt. If we gave every person in this country, over the age of 18, an equal share of the $85 billion (it’s now $120b) AIG bailout, each person would have about $250k after taxes. Now this would create an unprecedented economic boom in this country and, for that matter, the world. The only problem would be that this would do nothing for the country’s work ethic especially with the 18 year olds. So – if a WPA program was initiated it could be paid for by taxing the upper class that got rich off the past eight years and by cutting oil and war expenditures. This is known as the “bottom up” instead of the “trickle down” which worked like not at all. A WPA worked once and it can work again.

Obama is this generation’s JFK. He’s young and smart. John McCain is old (can senility and Alzheimer be too far behind?). At the beginning of this campaign I had respect for John McCain. Although I thought that either Hillary or Obama would be better suited to move our society and culture forward, I felt that if the Republicans’ were to win again, I hoped that it would be McCain.

He seemed to be a moderate and he seemed to put America first. Now I’m a Vietnam vet and my daughter is an Ensign in the Navy and I had respect for the man. Then he goes and gets this Sarah Palin for his VP. The question I have is what has made John McCain so bitter at the U.S. that he would put this woman so close to the White House? I can never forgive him for this. As far as I’m concerned he has betrayed us all.

As Obama has said we need change. We do need change to take us into the future of an ever shrinking world. But we also need to change back – change back to the market regulations which served us so well until greed and stupidity brought the system to its knees. “Throw the bums out!”

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