The ROG Report

Michael G. Haran, Proprietor

GETTING CLOSE

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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STAYING HOME

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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