Solving the Housing Crisis

In the interest of full-disclosure, I am a Realtor®. I think this bailout is insane and incredibly short-sighted!

 

Taking my Realtor® hat off and putting my MBA hat on, let me offer the following:

 

• I understand that liquidity is the problem, but injecting money does NOT guarantee that liquidity will improve nor will resolve the housing inventory glut.
  
• Looking at the St. Louis Fed's credit numbers, credit is at literally an all-time high.
  

 

This is like putting water in a blocked toilet and flushing again and again…it doesn't break the blockage!

 

Now, I have not necessarily heard how this package directly addresses dealing with:

1. Oversupply of inventory, created by
   
2. Rampant foreclosures
   

which seems to be at the core of the crisis (foreclosures – really oversupply).

 

I think the most conceptually simple approach (the devil is always in the details) is:

1. Provide a 40, 50, 60 year amortization for loans in trouble (at market rates), not a 30-year rework…which essentially gets you to a minimally different payment.
   
   1. This keeps homes off-market, creating price support due to the current level of demand competing for a reduced supply (inventory) of homes.
      
   2. This has the ancillary benefit of keeping property values up (not artificially, but by ACTUAL, desired home ownership) which benefits state and local economies (who rely on property taxes) based on valuation
      
2. Trade off a portion of the equity on the back end of the sale for the privilege of doing this rework, say 10%, for the opportunity to do this.
   
   1. This would have the effect of neighborhood stabilization (lest remaining homeowners just get fed up and leave the keys on the counter and leave at some point, if they see their homes go underwater to the tune of $50k, $100k or $200k as their neighborhoods implode). This encourages value preservation.
      
   2. This 10% trade off would also discourage homeowners from "working the system" - and hold the homeowners accountable for getting in over their heads - if they had to provide an additional lien for $20k on a $200k home (present value); while permitting a MEANINGFUL adjustment to payments of homes that are in trouble.  Also, this additional lien discourages churn of those homes when values start to improve and brings them into the market only when appreciation is substantially over the encumbrances (including the 10% trade-off noted in #b).  The homes would HAVE to be owner-occupied.
      
   3. Now, I would waive the 10% if they paid their homes off earlier than the 60 years (say on the original 30 year schedule) – to encourage equity accrual.
      
      
   4. Require homeowners to purchase some sort of life insurance policy that pays off the mortgage, should they pass away prior to the 60 year mortgage being paid off.  Guess what? This creates a wealth transfer to the heirs of the troubled homeowners, too!  (Great reason to abolish the death tax!)
      
3. How do you fund the gap between the cash flow of the 30 year loan vs the 60 year amortization? 
   
   1. Create a private investment fund for raising funds for this endeavor, perhaps with tax free benefits paying, say, 7%, after all, at 10% return on the back end, you would make 3% differential (mind you, I haven't done an NPV analysis or time-value of money analysis on this).
      
4. Moreover, this would ESTABLISH VALUE of these mortgage assets due to increased (or, really, commencing) cashflows from the DISTRESSED loans.
   
   1. Moving from a 30 year to 60 year loan would reduce payments by 15% (from $600 per $100k @6% to $514 per $100k @6%).  (That doesn't take into account the differential from reducing the rates based on percentages.)
      
   2. That benefits banks as 85% of something is better than 100% of nothing. This should increase cashflows in the credit market and permit the ability/encourage willingness to loan in the market. The differentials (the remaining balance of the loans in distress) would be funded through the private investment fund noted above.
      
   3. If there were a gap remaining there, THEN fund THAT. I mean, we are putting 1/14th of the GDP into Wall Street in one bill. That's insane.
      

 

The net-net is: You keep supply of available homes down. Due to the implicit requirement of having any given home needing to overcome its encumbrances, these homes should not churn until value (and equity) is acquired. That is equity that can be used to move up somewhere down the road, or provide a legacy to these homeowners' family and children.