The MGH Report

Michael G. Haran, Proprietor


Posted by on Mar 9, 2009

Forget nationalizing the banks. Forget nationalizing the auto industry. If the government is serious about stopping the deflation that is ravaging our economy they should take over every “underwater” home in the country.

The Treasury’s $75 million Homeowner Affordability and Stability Plan is supposed to provide up to 4 to 5 million homeowners with new access to refinancing and enact a comprehensive stability initiative to offer reduced monthly payments for up to 3 to 4 million at-risk homeowners. The two main features of the program will allow homeowners who own up to 5% more of their home’s current value to be able to refinance and homeowner’s that owe up to 50% more than their home’s value would be eligible for a loan modification.

The problem with this program is that it is estimated that it will only help about 20% of the at-risk homeowners. That means that 80% troubled homeowners could lose their homes to foreclosure. The program does nothing to stop the current slide in the value of U.S. homes which is the root cause of the credit freeze.

The program states that, “This plan will also help stabilize home prices for homeowners in neighborhoods hardest hit by foreclosures. Based on estimates concerning the relationship between foreclosures and home prices, the average house in the U.S. valued around $200,000, the average homeowner could see his or her home value stabilized against declines in price by as much as $6,000 relative to what it would otherwise be absent the Homeowner Stability Initiative.”

This is like spitting on a forest fire. The ink wasn’t even dry on the plan when new number emerged showing the median value of a U.S. home fell to $170,000 down from $199,000 in January 2008, a 12-year low. How does a 3% “price stabilization” compare to national home prices which, according to the Standard and Poor’s/Case-Shiller price index, fell 18% in the fourth quarter of 2008. Offer this plan to homeowners in Phoenix (down 23%); Las Vegas (down 33%); Miami (down 29%); Los Angeles (down 26%) and they’d think you were crazy.

This plan looks like the Treasury is trying to buy time until the economy turns around and is not really intended to bottom out this deflationary cycle. It seems they are treating this decline like any other housing cycle. Well this isn’t just any other housing cycle. When the CIA starts to track the economic melt-down you know the crisis is real.

The way it works now is when a bank forecloses they try to sell the home for whatever they can get knowing full well that the taxpayers will cover their losses. The banks have no interest in maintaining the foreclosed home which causes whole neighborhoods to deteriorate. If the government allows mortgage reductions it will encourage paying home owner to walk away from their homes knowing that it will be many years before they see any equity in their homes as speculators and first-time buyers buy up their neighbors homes at discount prices.

The government should treat the housing crisis as a national emergency. The number one priority should be to stop the nation’s declining in home valves that are wreaking havoc through out the economy. The way to do this is for the government to take-over every underwater foreclosure in the nation. It would be like what Paul Volker did in 1982 to stop run-away inflation. This would stop this recession dead in its tracts.

The mortgages on these homes should be kept in place and not written off. The people who were foreclosed upon could rent the home back from the government which would also achieve one of the Homeowner Affordability and Stability Plan’s objectives which is to stabilize the rental market.

The feds would then own the homes until the market value of home once again reached the value of the defaulted mortgage. This could take 2-5-10-years but who cares, the government isn’t going anywhere and it’s an investment in our country’s future. The home would then be sold (possibly back to the defaulting family) and the mortgage’s principle would be paid off. The system to deal with foreclosures is already in place through FHA, VA Fannie Mae and Freddie Mac.

This proposal would not cost the taxpayers any money and it would create hundreds of thousands of jobs through property management and home maintenance, the cost of which would be mostly paid for through rental income. It would also give the government time to work through the mortgage derivatives mess.

The devastation to our economy was caused by an artificial over supply of home building. We can’t wait for normal population growth to correct the market. We need to fight artificial with artificial and get every underwater foreclosure off the market. NOW!


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Posted by on Mar 9, 2009

For the life of me I don’t know why everyone in Washington is surprised about the fact the banks aren’t making more loans. Like banks making loans will turn the economy around. Get this straight – banks don’t lead they follow. A core banker (not the mathematicians known as financial engineers that turned the financial sector into a big Ponzi scheme) makes money off other people’s money.

It was kind of funny watching all of these financial “experts” in Washington give the banks $165 billion dollars and wonder why they have used the money to buy other banks, shore up their balance sheets and not make loans. It was also funny watching Congress bash the bankers and wonder why they weren’t making more loans. But it wasn’t so funny listening to Timothy Geithner, the new Treasury Secretary, saying that he doesn’t have the slightest idea how to fix the problem.

The reason the banks haven’t made more loans is because there is currently very little to lend money on in this economy. We are still in a deflationary cycle and banks won’t lend now because businesses and people need the loans. They won’t lend on real estate because home prices haven’t yet stabilized; they won’t lend to consumers because they could still lose their jobs; they won’t lend on cars because of the instant devaluation. As the old adage goes banks will lend money to you only if you don’t need it.

To shore up the nation’s insolvent financial system numbers as high as $1 trillion are being thrown around. The banks want the money to attract private investors so they can make more loans. No investor is going to invest in an industry that is so stupid they pay out billions of dollars of taxpayer money in management bonuses, buy golden toilet paper fixtures and not expect a public backlash. No one’s going to invest, that is, without a government guarantee.

I got a better idea. Let’s focus on the best ways to put the money into the economy from the ground up (not the top down) to jump start the economy. Cash will be flowing again and the banks can get back in the ball game making money off the productivity of others. The thing to remember it doesn’t start with the banks.

As far as Mr. Geithner goes it’s hard for him to see the forest through the trees. As a Wall Street insider he argued against reining in the financial manager’s excessive pay (I guess someone has to support the upper-end real estate market). But that’s small potatoes considering what’s facing this nation. I know Obama wants transparency in his administration and I’d rather have a few gaffs like this as opposed to the clandestine nature of the last administration. However, I think sometimes a little political “speak” would do better than a remark like “I really don’t know how we are going to do this,” which freaked everyone out.

The problem is Mr. Gaither is still trying to find a way for the financial sector to be a leader in getting us to the bottom of this cycle. Well it isn’t going to happen. You could give the banks all the money the treasury could print and it’s still just going to sit in their vaults. They’ll continue to cry that they can’t value their losses (lets take a bundle of mortgages or credit card debt; apply an algorithm to inflate the value by $50 trillion; let investors buy in at different values; and gee, what went wrong?). They’ll want the taxpayer to give them more money so they can attract private investment so they can be in a position to not make more loans.

No, this is not going to work. What should happen is that the government should give the banks just enough money so they can stay solvent and tread water until the economy bottoms out. The feds could hold the remaining bank bailout money as a reserve for the stimulus package. Money should be available to the Small Business Administration because even in good times, banks won’t make a small business loan unless the government guarantees it. The proposed Consumer and Business Lending Initiative, which is intended to foster consumer and small business lending, would be a good thing. More tax incentives should also go to venture capitalists for it is they, not the banks, which fund innovation.

Other than job creation all the stimulus and bail-out funds should go toward housing. It’s obvious that congress really doesn’t get this since the last thing they eliminated from the stimulus bill was the $15,000 tax credit for buying a home.  This credit was supposed to be temporary and used to help bottom out the housing sector which should be the feds top priority.

The Legacy Asset Partnership Bank (LAPB), which would be a government agency designed to acquire bank’s toxic assets, could be another good thing. If the feds took all of the banks liabilities such as non-performing loans and REO (bank owned real estate which to a bank is a liability and not an asset) at cost, the government could hold them until the economy turns around and then sell into a healthy market at no loss or even a profit. It worked in Sweden and it could work here.

Let’s say the LAPB bought every one of the 8 million foreclosures that are expected this year. Loan modifications will forestall about 20% of these foreclosures but there will still be many people that will lose their homes. The treasury should take every foreclosure and hold the properties until the market justifies a sale for the amount of the defaulted loan.

A U.S. housing cycle usual encompasses about five years. The housing market normally goes along; the population grows; lack of supply causes prices to rise; builders build to meet this demand and overbuild; the market weakens; prices stabilize; and the housing market goes along. This cycle will be longer because of the artificial over supply of homes but it doesn’t matter since the government isn’t going anywhere.

This way, not only will we be quicker to bottom out the major cause of the devaluation that’s paralyzing our economy but we also might also make some money in the bargain. After all, I wouldn’t mind owning a one 300 millionth share of some 8 million homes. Of course the money would go to pay off our budget deficit but wouldn’t that be a nice gift to our children.

The LAPB could also take all of the so called derivatives, pull them apart and sell the parts that are performing and either hold the non-performing loans or write them off if the borrower has gone through bankruptcy. This way I think the government could attract the investors that the banks are courting with our tax dollars. Who wouldn’t want a bottom line partner like the U.S. Government? Once the banks are healthy again and the economy has turned around these investors could once again invest in the private financial sector.

Geithner said that “governments are terrible managers of bad assets – there is no good history of governments doing that well.” Well, I got news for Mr. Geithner all you “brightest and best” better learn pretty quick because it’s the government that’s going to re-regulate the financial system and it’s the government that’s going to manage the jump-start of the economy. And there is a history of the U.S. government doing this well as in the Great Depression, WWII, and the S&L scandal in the late 1980s. And the government has an extensive history of managing foreclosures through the FHA, VA, Fannie Mae and Freddie Mac. Like it or not it’s the government time to pick up the bat and step up to the plate.

This is exactly why we believe in our system of government and this is exactly why we support it with our tax dollars. Once the economy is running properly again and the financial system has been re-regulated, the feds can slowly turn the economy back to the private sector and the banks can once again do what they do best.

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