Underwater World Revisited

OK, so the Treasury is not buying out bad mortgages from troubled banks; it’s not what the bailout bill said, but it’s just fine with me. Focus on the homeowner, the consumer and the employee… and Mr. Treasury Secretary, if those “financial institutions” you are buying into do not flow money down to the people that need them… Oh, I forgot, you’re gone in about two months. But in case we all forget how long two months can be… it’s been almost two months since the stock market melted on September 15! State legislatures are debating solutions to a federal economic problem, and private companies are creating their own bailout “plans,” because no one believes our government is on the right path. And the market is voting on your plan, Henry… it keeps falling!

Yes we need to create new jobs by opening up infrastructure repair and development immediately, we must act to un-freeze local credit and fund payrolls, incentivize employers who create new jobs (recreate the markets)… and yes, General Motors and Ford cannot die forcing literally hundreds of thousands of workers (at the plants, vendors’ facilities, etc.) into the ranks of the unemployed… but we also need a simultaneous and equally prioritized solution directed at America’s “savings account” – the measure of hope and the American dream – the housing market. Now! Not in three or six months, when the number of homes with negative equity (where the remaining mortgage is greater than the value of the house) could rise to one third more of the total!

Whether Americans were right or wrong to treat their homes as savings accounts is a question that is no longer relevant; it happened and the collapse of the housing market, combined with job loss (actual or feared), washes through the retail community like a tsunami… costing even more jobs and creating even more real estate defaults.

Why in the world does anyone think we can reach “bottom,” much less begin to turn this economy around, when 23% (a number that is rising fast) of all American homes are worth less than the outstanding mortgages? Look at these numbers (the percentages of homes in each designated state that are “underwater” or have “negative equity”):

Nevada 47.8%
Michigan 38.6%
Arizona 29.2%
Florida 29.2%
California 27.4%
Georgia 23.2% (approximately the national average)
Ohio 22%
Colorado 18.3%
New Hampshire 17.2%
Texas 16.5%

What to do? Let me repeat (broken record Dekom) one possible path that seems to be vaguely on the radar screen, in scattered parts. But I sure hope we do not have to wait 70 days to begin implementation as a rudderless lame duck administration seems paralyzed and continues to focus on institutional rescue plans at the expense of homeowners.

1. Impose a 120 day moratorium on foreclosures, and a 60 day grace period (loan extension) for those in current default by act of Congress. Lame ducks, start quacking!

2. Impose a cap on all mortgage interest rates (I recommend 6.5%) on U.S. based owner-occupied residential real estate by act of Congress.

3. Congress should direct the Department of the Treasury (with the FDIC and the FHA) to establish reasonable criteria ("Federal Standards") on what constitutes a creditworthy borrower and the basis of the appraised value of a home. Appraisals could be per property appraisals or, if there were sufficient volume, average price decreases could instead be based on an overall sub-zip code analysis.

4. We would mandate that the bank or thrift originating the loan (including successors that bought these banks) be charged with dealing in good faith with residential owner-occupied real estate borrowers who meet the above Federal Standards. They would be required, as a condition of maintaining FDIC status, to make the requisite reevaluations, but of course, they can require applying homeowners to pay appraisal fees. This would apply even if such banks "sold" the mortgages to a "bundling" hedge fund or other financial institution, which fund would be automatically subject to the restructure.

5. On petition of a federally regulated bank or thrift, based on reasonable due diligence by that lender, Treasury and/or the FDIC would be required (perhaps to a cap to keep the mega-wealthy from benefiting) to pay the petitioning bank a sum equal to the amount that value of the home in question exceeded the loan against the property if the borrower and the property meet the above Federal Standards, provided that: the homeowner accord the government a flat percentage of the gross selling price (whenever they sell with no time limits) reflective of that "underwater" contribution by the feds and that the homeowner would then continue to service the readjusted loan and occupy that house as the primary residence. I would suggest that this percentage owed to the taxpayers vary to no more than somewhere between 5%-20% of the selling price (depending on the size of government investment), but the homeowner would be forced to pay this percentage only to the extent that the sold property will have appreciated above the mortgage price.

This structure keeps people who can afford the "carry" in their homes, reduces foreclosures (but clearly cannot eliminate foreclosures on property where there is no economic justification to subsidize a loan with a borrower who simply cannot pay a real mortgage), helps stabilize the housing marketplace (only bad credit borrowers would be defaulting), begins to restore consumer confidence (since most our economic perception is based on our jobs and our homes), gives taxpayers a real shot of getting their money back (maybe even a profit), does not create a massive federal bureaucracy to deal with millions of homes (the work is done by the originating banks), does not reward the institutions who built their net worth on buying derivatives by bailing them out, and takes a smaller tranche of money - only enough to cover that part home loan that is underwater (not the whole loan) - which effectively supports the rest of the loan (a huge multiplier of value).

The Federal Housing Agency announced an effort earlier in the week – to be implemented through Fannie Mae and Freddie Mac (which own or guarantee half of U.S. mortgages) – to begin a “restructuring” plan for those 90 or more days behind in their payments but who still have home equity of at least 90% of loan value, reducing the principal balance so that interest costs cap at 38% of the relevant homeowner’s income. Isn’t that just like the government – helping only those in serious default while ignoring the rest? So to get government help, you need to stop paying your mortgage?

JP Morgan Chase, Bank of America and Citigroup have all announced plans to freeze current foreclosures and restructure home loans with customers who are able to continue payments but might otherwise face negative equity. While the government is “considering” different additional “plans,” when the private sector believes that they can’t wait for a federal solution to the hemorrhaging housing marketplace, you know government action was needed “yesterday.”

By addressing this huge grassroots problem while restoring jobs, the rest of the markets can find that bottom that will trigger a recovery, albeit a long slow process that could take years. The old rule that the stock market is the first leading indicator of recovery seems to be a myth. True, the Dow reacts faster than any other indicator... but let's face it, the markets need to see a sustainable path to react to.

I’m Peter Dekom, and my voice is getting hoarse from screaming this so often.