Over the last seven days the papers have been full of new ideas to help the troubled home market. Anyone that is interested in the economy, job growth and unemployment must be concerned with the health of the housing market. Until housing is back on a solid footing the US economy will be wobbly at best, and at worst it will have a second recession. Bank of America’s proposed plan to help 45,000 homeowners is laudable but about as effective as using a squirt gun on a home fire. What is important about Bank of America’s plan is that after three years of blindness they have cracked the door open to the unpleasant, smelly reality of the housing crisis and offered a solution to it.
Banks and investment banks played with the US economy and profited mightily at the expense of America on the whole. Regardless if you were conservative and never played in the housing boom, you were used by the banking industry and are now worse off for it.
On Saturday the Reno Gazette-Journal ran a front page story “Rescue may miss many who need it”. First, let me say in essence that the paper is correct. Bank of America is recognizing that 45,000 very sick homeowners are going to lose their homes. The real issue is that those 45,000 are the nearly dead and it is the 16 million homes underwater that need to be focused on and until all banks step up to the plate, housing is flying south for a very long and bitter winter.
I want to acknowledge just how difficult acting on the problem really is. The banks have woven a web of curious networks between insurers, investors, servicers and others with protections, profits and liabilities that can be hard to understand. Despite the problems we are facing, some are profiting from the chaos, not least the very assorted banks and investment banks that brought on the disaster to the American people.
On one hand the commonly held belief, still held by many, is to let the cleansing process work itself out. Many homeowners that never bought during the boom, or have free and clear homes, are heard to shout this sentiment out and cast all that are in trouble as dilatants that have received their just rewards for not being smart like them. Without a question in 2006-2007 tens of thousands of people lost their homes that should never have ever received a loan. But now we are talking about 2010. We are talking about people that bought homes in 2007, after the “bubble burst”, fully qualified for a home, put 20% cash down and today are underwater! We are also talking about homeowners that purchased homes in 2001, well before the much talked about “bubble” and put 20% cash down and today have homes that are underwater. Our market has rolled back well beyond the stupidity of 2003-2006, back to 1998-1999 values.
In the Saturday RGJ article titled “Rescue may miss many who need it”, University of Nevada, Reno economist Tom Cargill said of the new Obama plan “it’s a terrible waste of taxpayers’ money. It uses taxpayers’ money to support bad decisions made by people to buy homes they can’t afford.” Personally, I highly disagree.
We are looking at homeowners that now realize that they are $200,0000-$500,000 upside down in their homes. These were all qualified buyers, who all put down 20% or more and are underwater. Mr. Cargill, please tell these tens of thousands of Nevada homeowners tough luck and that they made bad decisions. Please tell them to forget that they owe more money than most and to go out and become consumers again and run up their credit cards and spend money so the economy can grow and the banks can profit and they just need to suck it up and in 7-12 years, if they are lucky, their homes just might, maybe have some equity in them.
What needs to be done? I suggest the radical notion of the following: protect the principal, protect the investors, encourage homeowners to pay off their principal loan balances. First, work with all homeowners that have homes underwater and who are current on their payments. Move all loans to a .5% interest based on a 15 year amortized loan. Years 1-5 are at .5%, years 6-8 are at 4%, years 9+ are at 6%.
Example: A $300,000 loan @ 5.5%/30 years has a P.I. payment of $1,703 per month. .5% has a payment of $1,730 per month. The point here is that many homeowners are short selling as much as they realize that it will easily be 10 years before they have equity but can make the payment. With a 15 year loan not only do we have free and clear homes in 15 years in a mere 5-7 years, the loans will have been paid down so much that with no appreciation whatsoever in the housing market the homeowner will have equity.
For those homeowners that are not current they can be offered 20, 25, 30 year loans. In the same example the loan payment would drop over $800 per month on a 30 year loan. If that does not save the homeowner then per Mr. Cargill they truly overbought or their income has been cut so much that foreclosure is their only option.
Drastic? Not really. Homeowners take homes off the market, principal is preserved, fewer homes for sale, better chance for stabilization. Better stabilization and growth, better tax income for the city, better confidence in an individual’s personal financial position, the more likely they are to spend money. The more money they spend the more taxable income to the state, the more confidence homeowners have about themselves, the more likely to buy services, the more services they buy, the more companies can expand and hire. The more people that have jobs the better the economy and so on.
What about the federal government and the bailout money? Well obviously .5% for 5 years is a bit painful for the banks so that money goes to give the banks/investors a 2% additional return for years 1-5. When a seller sells in years 1-5 they pay to the federal government a percentage of the profits, if any, as a form of repayment.
Investors get their principal, banks stop write- downs, banks stop paying tens of thousands of employees to handle bad debt, banks save hundreds of millions of dollars on foreclosure costs and write-offs, homes come off the market and prices stabilize.