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- Mandate responsibility rather than granting absolution in the mortgage crisis
Mandate responsibility rather than granting absolution in the mortgage crisis
By Kenneth Hardaker Published: 02/17/2009
Mandate responsibility rather than granting absolution in the mortgage crisis
Flaw in approach:
We need a solution that keeps people in their homes with the lowest cost to the taxpayers, reducing the anticipated increase in the national debt from this economic crisis that truly addresses the issue. The reality is that many of these properties in today’s market are worth significantly less than the balance due on the note, creating loan to value ratios (LTV’s) in excess of 100%. A 30 year amortization will not allow for these loans to conform to reasonable debt to income underwriting guidelines. Without a government guaranteed and mandated program that extends the term and allows for LTV’s in excess of 100%, we will continue to see abandoned homes, families forced from their homes and forced to live in unsafe living conditions, while the economy and in particular the housing market continues to sink into the abyss.
Recent dialog in Washington, considering nationalization of the banks, is in a word, un-American and unnecessary. Why would any elected representative be so quick to simply abandon, a core component of what makes us American, the free enterprise system. We are a democracy, with our economic roots based on capitalism, created by the blood and sweat of millions. This whole conversation is an insult to all those that came before us, who sacrificed and died for this country. I do not believe that any of those brave soles died so we could create of socialist state.
Instead of bailing out the banks by pouring trillions of taxpayer dollars into a black whole, and or nationalizing the banks, let us come up with a solution that would hold the parties somewhat responsible, including the buyers that applied for loans to buy homes they could not afford, and many of them knew it.
The problem with the Hope for Homeowners Program (H4H) is that it does not address the main problem of depressed home values by utilizing 96.5% of the newly appraised value. If I bought a home with 10% down and the value of my home is down 30% or more, the current H4H program will be of no value. Lenders have no real incentive to write down the balance on the current loans and honestly why should the borrowers gain such an advantage, over others who did not overextend themselves and are now being asked to help, with their tax dollars.
The banks should quite frankly, not have any options in a government-backed program to bail them out of a mess they participated in creating. The amortization terms very well may need to exceed 40 years, to allow borrowers to fall into acceptable debt to income ratios. Interest rates may need to be subsidized at below market levels and that cost should be born by the banks. The banks also need to be required to have all income verified this time, as well as assets and liabilities.
Unfortunately, many of the same individuals and entities that were complicit in creating this mess, will be enabled to increase their future profits on the back of America’s distress if we do not find a way to sure up the American homeowner with equal resources and energy used to assist our banks. These entities and individuals will take advantage of the distressed pricing of these homes through a myriad of corporate entities, acquiring these undervalued assets, to profit again on the backside of the recession they helped create, when real estate values begin to recover. The only losers in all this will be families and the taxpayers. This would be the biggest travesty of all, if these financial companies were allowed to form companies to acquire these distressed properties they helped create for pennies on the dollar and then later profit from their sale, post recovery.
Possible Solution:
Our greed created this mess, and it is time people involved take responsibility for their actions, and not simply look for the easy way out, on the backs of others. It is not time to abandon America and its ideals, nor is it time to mortgage future generations to pay for our mistakes.
Properly enhancing the H4H program could make the program more effective, reduce the number of foreclosures further than the existing program ever could, thereby reducing the inventories and stabilizing prices faster. I believe that the current program will not achieve its desired result.
First, we need to regulate the banks, not nationalize them. Nationalization is a slippery slope, while regulation could resolve the problem, if properly monitored and enforced. The banks have proven that they cannot and will not regulate themselves, and that greed will overrule common sense it appears, every time in our financial markets. The S & L crisis in the 80’s, should have been a warning, but it was not heeded. What a surprise that they were back to some of the same unsafe practices and more a decade or so later, that led to the current crisis. Lenders need to be required to accept these new government guaranteed financial instruments, with lower than market rate terms (absorbing the cost of the interest rate subsidy), LTV’s in excess of 100%, along with stringent regulation of the entire industry.
A homeowner that qualifies for this modified government program (based on proper debt to income ratios) could keep their home and have payments that are more affordable, but need to be required to accept some of the cost of their actions as well. The new loan would have a fixed below market interest rate, and a long enough amortization period to ensure the loan will become a qualified performing asset. Rather than allowing them to walk away, require them to accept a 40 to 50 year mortgage term, along with other caveats, rather than accepting their bankruptcy filings. They would have to pay tax on the interest rate subsidy, and upon future sale of the home, pay a special one time tax to the government of 10%.
A homeowner with a $350,000.00 mortgage could have their mortgage recast under a Government guaranteed loan at let us say 4.5% for 50 years for a P & I payment of $1467.00 a month. This would reduce the payment on that $350k loan by about $465 a month when comparing it to a 30-year loan at 5.25% of $1932.00 month. That $465 a month may be the difference between keeping your home or foreclosure and bankruptcy at the expense of us all. Borrowers would be restricted from obtaining any form of equity loans against these properties for up to 10 years rather than the 5 in H4H. The restriction would include all other types of new debt for 3 years (with certain hardship provisions), to ensure they have time to stabilize financially. The value of the interest rate subsidy (or in this scenario the difference between 5.25% and 4.5% or 0.75%) would be additional taxable income to the borrower each year since it is income (subsidized interest), and would increase current income tax revenues for the treasury. The mortgage would also have a 10% capital gains tax attached to it, in addition to any other tax that exists or may exist at the time the properties sold. All such toxic loans refinanced, would be re-amortized to include all past due amounts and fees, bringing the borrowers current, with only a first mortgage on the property. These loans would require some sort of mortgage insurance as well. Over time these mortgages will attrite away as people refinance in the future or the homes are sold under more favorable economic terms, similar to homes from the Resolution Trust days.
The reduction in the number of foreclosures would reduce the supply of houses in the marketplace, and should allow price stabilization to occur sooner. The amount of cash needed upfront by the taxpayers to bail out the banks on these loans, could be reduced, freeing up government resources or reducing the need for government borrowing. Fannie and Freddie could be re-tasked to manage and service this program. The banks and the borrowers would not be transferring all of their mistakes onto the rest of society. New bank regulations would require banks, to begin lending again based on this new solvency testing being talked about.
Benefits:
• Fewer homeowners facing foreclosure and staying in their homes, saving hundreds of thousands of families
• Families and Banks involved required to be responsible for more of the costs in return for a second chance
• Government has short term and long term tax income opportunity
• Government guarantees rather than cash bailouts and increasing national debt
• Banks would have Government guaranteed performing assets rather than toxic loans helping to thaw the credit markets by improving bank balance sheets
• Stabilization of home prices as a result of slowing down the new supply of inventory
• Spreading the cure over time to allow the economy to filter through this mess, combined with strict new banking regulations
• Introduction of up to 50 yr. terms allowing borrowers to qualify under proper and documented underwriting criteria, with the end of the no doc and interest only mortgage loans
• New stringent bank regulations
• With any luck, stabilizing a major sector of the economy and fueling some economic recovery
There is no perfect solution. However, it certainly is better than forcing the majority of hard working responsible Americans to pay for the mistakes of a greedy and or irresponsible few, or having hundreds of thousands of our fellow citizen’s forced to lose everything, when we could offer them an option to save their homes.
Kenneth Hardaker
New Jersey