Underwater World

Why in the world does anyone think we can reach “bottom,” much less begin to turn this economy around, when, in addition to massive job loss and a dwindling ability to fund payrolls (which washes through the retail community like a tsunami… costing even more jobs and creating even more real estate defaults), so many Americans’ savings are reflected in their homes? And 23% (a number that is rising fast) of all American homes are worth less than the outstanding mortgages? Look at these numbers, published this morning on AOL (the percentages of homes in each designated state that are “underwater”):

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 suggest an even more refined version of my past suggestion. But I sure hope we do not have to wait 75 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.

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 (and the FDIC) 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 vary to no more than somewhere between 5%-20% of the selling price (depending on the 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 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, 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).

By addressing one huge grassroots problem, 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 I approve this message.

Bail or Fail?

So is the “rescue” plan a good one? Are we going to be fine now? No and no! But I’m glad they did “it.” The value is that Congress did a “something” that the markets needed, but the financial world is still looking at a longer term mess. Had our lawmakers not passed “some relevant” legislation, the frozen credit markets would have killed the payrolls of thousands and thousands of businesses, forcing them to close and miss payrolls. And missing those payrolls, laying off workers, would have been a tipping point – probably of no return. We would have seen a ripple effect as laid-off workers, just before a Christmas shopping season, would have accelerated the foreclosure debacle and killed the economic reality of America ’s most significant retail season. We would have had an instant severe, very deep and long term recession, maybe even a depression.

When the government’s Securities and Exchange Commission (the SEC), a an administrative agency within the Executive branch of government under the control of the President, horribly deregulated our financial institutions in 2004 (allowing such institutions to carry debt loads equal to 33 times their equity – imagine if we “ordinary people” lived like that), and Congress knowingly let that market slide into this deregulatory abyss without insisting on or applying any necessary oversight… when funds pushed mortgage lenders to lower their standards to create more deal flow (and more fees to Wall Street traders) in the housing market (and home prices went up because more buyers – the demand side – fought for a fixed set of homes)… well those problems still exist to some very significant extent.

What this means for the rest of us is that there will be some letting loose of the harsh impact of the real costs of borrowing after “teaser rate” mortgage structures expired and that more homeowners should be able to negotiate their way to stay in their homes, even though Congress did not provide what I perceived to be a highly desirable moratorium on foreclosures to give people time to take advantage of this new system. There will be a bit more lending going on, but the standards for loans might still prevent qualified borrowers from accessing that capital. Some kids are not going to get money for college based on their parents’ ability to take equity out of their homes, and some businesses are not going to get the capital they need to grow and create new jobs. Getting money for a new home purchase is not going to be easy enough so that housing prices are going to recover any time soon.

So how do we think of all this? First, and this is essential, if you think of the $700 trillion as a write off, you might as well find another country to live in. Assuming that our government is even mildly competent (a big assumption), that sum has to be viewed as a longer term investment, supported by underlying assets (mostly real estate and the mortgages that are still working). In time we should be able to generate most of that “investment” back, and we may even make a small profit. So we really have to swallow hard and ignore this as a huge black hole.

That means, with fiscal restraint, the government must now shift to creating a platform for viable growth in the near term. I still think we're going to be in a recession for no less than 15 months, but the government has opportunities to incentivize growth though encouraging job creation in the places we need it most: infrastructure, alternative energy and health care. The government also has to stop playing with words in the educational arena. If we want to stop exporting jobs, we need to up the ante in our vested skill-sets, and that means education has to become and remain a priority. Our representatives have to figure out how to make this happen under the perception of the impact of a $700 trillion bailout. And we as taxpayers and citizens have to help them get there.

I’m Peter Dekom, and I approve this message

Can This Really be Happening?

Not the financial meltdown; we know that it is and the recovery is going to take a lot of time and effort! I’m talking about Republicans and Democrats saying nice things about their mutual efforts in securing the overwhelming passage of the Senate version of the bailout bill on this first day of October. Could America actually work like that? Or are we like the petty and shameful voices of the House of Representatives that eroded in mutual derision and over-simplifications that drew justifiable criticisms in the same effort earlier in the week?

Are we looking for the differences between and among us or trying to find the “tie that binds”? Are we trying to impose our religious or doctrinaire views on others or willing to respect that others may disagree? Exactly who are we? And if the “other party” wins the election, what is our commitment to the United States of America ?

How will Americans behave after the bailout legislation, in whatever form, passes (I believe it will) and after the November elections? We're not going to step into a world of fat jobs, juicy paychecks, easy credit and ever-escalating real estate prices. Prosperity is not just around the corner. This time, we have to earn it, each and every one of us.

So as we watch candidates promise what they probably cannot deliver and see others “getting away with murder,” do we throw up our hands bitterly and walk away or do we pull together to make it work? The Senate today gave America what it really wanted: Unity and Leadership. They didn't promise this as the complete fix, but they also didn't stare into the cameras pointed at them and tell us that the world would end.

We need our citizens to have at least two goals: 1. fix themselves and 2. help others who need help in dealing with this crisis. It’s selfish, really, helping others… it is what makes it all work so that the whole becomes where we really want to be, where we want our sons and daughters, our grandchildren, to live and grow. It’s what makes America … well… America again. Remember how that felt? I want it back.

I’m Peter Dekom, and I hope you approve this message.