STAYING HOME
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.