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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