The MGH Report

Michael G. Haran, Proprietor


Posted by on Feb 26, 2009

We have two new adages to add to the housing crisis lexicon. “Cram Down” and “Skin Game,” that can now be added to “Subprime,” “Toxic,” “Underwater” and “Upside Down.” Because Cram Down refers to a bankruptcy judge reducing the principal balance of a home mortgage it was probably coined by some residential lender. Skin Game is Secretary of Housing and Urban Development Shaun Donovan reference to mortgage lenders participating in loan modifications.

It’s now becoming clearer how the feds are looking to tackle the most important part of the recovery plan. Until housing is stabilized nothing else matters – nothing. Without housing stabilization all the stimulus money will be spent and we would still be at an economic stand still.

Mr. Donovan announced that the government’s current plan, which has yet to be finalized, would help homeowners on two levels. The first would be to help the “underwater” group who have been making their payment but now find their homes worth a couple of hundred thousand less than what they paid for them. The second group would be any homeowner who, in good faith, refinanced into a “subprime” loan which they now can’t afford.

The first group would get their mortgages reduced to the current value of their home. Say someone bought their home for $500,000 and now it’s worth only $300,000. There are a lot of these homeowners that have been watching their values erode while speculators come in and buy up their neighbor’s foreclosures. This program will allow families to stay in their homes and have some chance of future appreciation. For doing this the government could go partners with the homeowner in any future appreciation. Good deal for both parties.

The second group would have their mortgages modified to principal and interest payments of no more that 38% of their incomes. This percentage could be lowered to 30% if the lender or loan servicer agrees to forgo an additional eight percent. The secretary referred to this as “giving some skin” by the lender. He continued that if they weren’t willing to play “the skin game” then the lender wouldn’t be helped if the home goes into foreclosure.

I think we are getting close. But the feds have to do more. They have to keep the foreclosed homes out of the hands of lenders. These lenders will sell the foreclosed homes for whatever they can get for them. This not only decimates whole communities buy by locking in values that are as much as 70% below what neighborhood homes originally sold for, it perpetuate a continuing deflationary cycle which, if not stopped, will dilute any stimulus effect on the economy.

What will stop this deflation dead in its tracks would be if the feds bought all the foreclosures that are under water. They should then hold them until the market improved to the point where the home could be sold for the amount of the foreclosed mortgage or maybe even at a profit. I wouldn’t mind being a one three hundred millionth owner in some five million homes. And being partners with an entity that can legally print money is better than investing with say, Uncle Louie. Now wouldn’t that be a nice gift to our children as it pays down the deficit.

The conservative right might say that this is a form of nationalization or that the government doesn’t have the expertise to manage residential real estate but let me remind everyone that the feds are not only the largest owners of real estate in the country, they have a long history of managing foreclosures through the FHA, VA Fannie Mea and Freddie Mac.

My only beef so far is that the package is limited to just conforming loans ($417,000 or less). This completely cuts out the trade up market which comprises a large part of the middle class in this country. These are the people are the small business owners and service providers which are the main source of job growth in this country. These families have to be stabilized too if we are going to stop this deflationary cycle.

This limit is the same mind set in Congress that cut the $15,000 credit for buying a home out of the stimulus bill. At this point in the recession anything that promotes housing stability should be a top priority. The program should take more expensive area of the country into consideration. I’m not talking about the upper end. In this market, the rich are just going to have to fend for themselves. I’m talking about people that work hard to support their families just like every middle class community in the country. It’s just that these people happen to live in more expensive areas of the country.

The feds are getting close to stopping the one thing that keeps the recession from bottoming out – housing deflation. With a little more tweaking I think they’ll have it.

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