Monday, March 9, 2009

Homeowner Life Preserver

I recently commented on this blog site that Obama’s stimulus package had to be seen as one leg of four. We also needed a home mortgage response, a new budget (long-term and short-term), and a banking restructuring plan. We now have a proposed plan for dealing with the home mortgage issue that was the original thorn that pricked this economic bubble.

Fiscally, the Obama mortgage plan looks like a right step (even if long overdue) to keep as many people in their homes as possible. The method: refinance current mortgages to a payment level that can be handled by the homeowner, assuming that the new mortgage meets certain limits and profiles. Non-resident mortgagees (i.e. speculators) would be excluded from this program, which seems reasonable. Unfortunate, all of these restructured loans would still flow through banks, who are not required to restructure but will be “incentivized” (whatever that means!) to do so.

This program follows the lead of Shelia Bair, head of the FDIC. She has been commendably fearless and the only sane voice for the past year in leading loan restructuring as the right way to resolving mortgage failures in her takeover and resolutions of failed banks. It is a good step, and will hopefully convince banks to convert their bad loans into good, and thereby be lending once again. For me, though, I would go even further on the premise that having homeowners staying in their homes and paying a mortgage every month is the key to both ending the slide in home values as well as resolving the instability of banks.

Firstly, I would require the banks getting taxpayer dollars to make every possible loan rewrite; it is the price of them playing with our money. Or, if banks will not rewrite, then I would use Fannie Mae or some other agency to go into the business of making loans directly to these consumers. Lending competition from the US Government should force the banks to choose to become competitive once again sufficiently to drive the federal government back out of the marketplace (which ideally it should not be in). The overriding necessity is that problem home loans need to be restructured, by whoever will do it. Ideally, let the banks beat the government at their own game in order to resolve the problem they caused in the first place.

Secondly, I would throw out any means test for these problematic homeowners. Yes, I know that sounds crazy. But a lesson I learned years ago is that it is the consumer that holds the key to a bank’s success, just like any other business. If a bank does not lend money, it goes out of business – which is exactly what is happening now. NOT lending is unprofitable. Once I figured out that premise, I no longer thanked a bank for “approving” me for a loan; I expected them to thank me for choosing to borrow from them. And if one bank will not loan me the money, I am confident that someone else will.

The practical application of all of this is that:
· hardly anyone keeps an initial mortgage for 30 years anymore; they either continually refinance it, creating in effect a life-long revolving line-of-credit, or they sell and move and start a new mortgage;
· banks are constantly encouraging mortgagees to refinance so they get new loan fees and high interest income;
· banks invented the balloon mortgage – i.e. low payments now in exchange for higher payments 3-5 years later when loans are in effect “automatically refinanced.”

So we need to quit playing games: find a payment amount these hurting people can handle, write a 5-year loan to fit that amount, and automatically rewrite it again 5 years out. Continue this indefinitely. In 5 years the bank is just going to be looking to lend the money again to someone anyway. What do we or the bank care whether the same person or a different new buyer holds this loan a few years from now – it’s all the same mortgage money. The outstanding balance (perhaps with some smaller loss) can be finally made up at the point of future sale or death. Even if losses ultimately result, we will have spread them out over years instead of all at the same time right now.

This approach stops the loss of home values. It stops foreclosures. It keeps people in a mortgage, not defaulting. It keeps them in their homes in a “normal” and continuing life, not a disrupted one. And banks now make money (or at least substantially reduce their losses).

Is this “fair” to current homeowners who have managed their mortgages steadily and in good faith? Perhaps not. I have been paying on some form of a mortgage for 25 years, and am scheduled to do so with my latest loan for another 29½. My current mortgage is on reasonable enough terms, assuming I do not suffer an economic setback. It is the loss in home value that hurts me far more directly than whether my neighbor’s troubles provide him with a more generous deal than I got. But if I can help that person stabilize his/her mortgage situation, that indirectly helps me in the long run.

We are where we are. And there but for the grace of God go I. I can shoot myself in the foot by attempting to punish my defaulting neighbor, or I can suck it up, be generous to that neighbor, hoping that my generosity today will come back to help me later if/when I may need it. Or I can do this just because selfishly his/her new deal will thereby help me, whereas foreclosure will most certainly come back to hurt me. Ultimately we will all sink or swim together in this rather overwhelming situation. So we might as well all share a life preserver and swim to shore together instead of arguing about who steered the ship into the rocks.

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