Aug 10
17
Unfortunately, some observers suspected that the conference — currently underway — might be biased against homeowners and advocates for affordable housing.
As a bit of background, remember that in addition to the ongoing foreclosure and real estate valuation crisis, homebuilder confidence is sinking and mortgage backed bonds are slumping. The latter means that there are fewer buyers for the mortgages written by your local banks and mortgage brokers and that in turn means there may be less money available for them to lend. But back to Washington D.C..
In one corner, Bill Gross, the man who runs one of the biggest bond funds out there — not just mortgage based bonds, but all kinds of bonds — says that the current housing finance system just can’t be maintained. The only hope, he says, is to nationalize the whole thing, making a single Fannie Mae/Freddie Mac hybrid the sole purchaser of mortgages and mortgage backed securities. He also pushed for automatic refinancing of all mortgages currently in Fannie and Freddie’s portfolios (presumably at today’s super low interest rates, with forgiveness of principal so those homes are no longer underwater, preventing thousands if not millions of foreclosures and short sales).
In the other corner, Treasury Secretary Tim Geithner says the government must reduce it’s role in Freddie, Fannie, and the whole mortgage system as soon as systems are in place to make sure another crisis doesn’t happen. Or, as CNN put it, “Geithner says stop crying over Fannie’s spilled milk.”
I’m no fan of Timmy Geithner, but I suspect that the real solution going forward must lie somewhere between Mr. Gross’s “nationalize and refinance it all” idea and Mr. Geithner’s “shore it up and leave it alone” strategy.
Cross-posted at The Moderate Voice.
No cost housing stimulus – solution to the foreclosure crisis
Because of negative equity most underwater homeowners can’t sell their homes and they can’t refinance. Bankruptcy and/or default is not an option for most homeowners. Especially for homeowners that feel a moral obligation to meet their financial commitments. The unjustness of this predicament extends to all homeowners because about 15 million potential homebuyers are locked-out of a housing market that desperately needs more buyers.
From the mortgage/banking industry perspective; their survival is hinged on the hope that the underwater homeowners will continue to embrace their moral, social, and ethical values in spite of the financial hopelessness of their long term situation.
Until this quagmire is resolved our housing market will continue to suffer because the seller/buyer ratio is drastically unbalanced. Additionally, the number of bank owned properties are increasing which is also forcing serious downward pressure on home values.
Here’s the solution: “Equity Warrants”.
The underwater homeowner could issue an Equity Warrant to cover their negative equity thereby allowing the homeowner to sell their home even though the proceeds may not be sufficient to completely pay-off the mortgage.
This Equity Warrant would grant rights to the borrower’s future equity in any home they own. When, and if, the borrower’s future equity equals the amount of the warrant, the lender would have the right to convert the warrant to a note secured by the home owner’s real equity.
The downside to the borrower is that someday the warrant will be converted to a note that will require interest and payments. The downside to the mortgage holder is that they will not receive full payoffs for existing loans. The upside to the mortgage/banking industry–and our economy–would be a substantial reduction in the number of foreclosures.
However, to soften the impact to the mortgage holder, the warrants could be sold by the mortgage holders. As an ironic twist, instead of trading Credit Default Swaps, Wall Street could trade Equity Warrants.
This system would create millions of potential homebuyers, thereby improving our housing market and home values. Additionally, the underwater homeowners would have a respectable alternative to short-sells and defaults.
What would it take to make this happen? This system would need an act of congress to enact laws requiring mortgage holders to accept Equity Warrants from underwater homeowners.
For example scenarios go here: http://www.upostlive.com/eWarrants.htm
That’s a very interesting idea, Steve! Thanks for sharing.
I always personally thought that the TARP funds would have been better spent paying down $100k on each first mortgage in the United States: it would have cost less, prevented millions of short sales and foreclosures, allowed millions more refinancings, and the banks would have gotten the liquidity we were told at the time they had to have *or else!*. Not that it would have been a good idea, but it was a better idea than just handing the banks the blank check they actually got!