Fixing the Principal Deficit Problem

I’m not sure I deserve credit for this entry from Richard Widmark, but it has a great deal of merit. It should be expanded and I’ll publish it. His is a bare outline with not much to show the reasoning behind it. Yet I see glimmers of a solution if anyone would listen.

The presenting issue is that none of the homes are worth the paper that was written and signed. We all know that. But we also know that prices vary from place to place. And we know the appraisal fraud was worse in some places than in others. So without establishing another federal agency to go through each closing, how do you fix this? Richard sees a possible way. He gives me credit but I’m not sure why.

Summarizing what I see in Richard’s comment you start with each homeowner using a “stated value” of their home that they come up with. The program could be further refined by use of appraisers, but his point is well taken — if the homeowners can be kept honest we instantly have a correction to reality pricing and that is the only correct starting point for this nonsense.

The offset for the homeowner is that if they state the value too low, then the government or anyone else could come in and buy it. The homeowner is out. The more they want to keep the home, the higher the value they place on the home. In theory this makes sense and while neo-cons would be quick to point out moral hazard, I would be just as quick to point out that any moral hazard would be a drop in the bucket compared to what Wall Street did with these “values.”

A new obligation, note and mortgage is created at the real fair market value of the property. I would argue that the best stimulus for the economy is to use 80% loan to value since the prices are still going down anyway. The creation of a feeling of equity, even if it wasn’t all that solid would do more to prop up the confidence in the economy and confidence in a government that is dealing with reality.

The new loan would be funded. The proceeds would go to anyone who could prove they actually lost money on this deal starting with the purchase of mortgage bonds and ending with the new loan and the new valuation. I would argue that the investors should be required to use their “credit standing” if they can prove it, to hold a portion of the new loan rather than receiving funding from it. The funding would come from conventional lending, especially if you use 80% loan to value and conventional underwriting standards. I would argue that it is in the best interest of the country to make some accommodation (perhaps a lease) to those homeowners who cannot afford to own the property even if the terms are drastically turned in their favor.

Government guarantee programs, as opposed to actual funding will cause actual liquidity in the housing market and allow these deals to go forward and the regular purchase and sale of homes to go forward using a higher degree of certainty about prices. The actual out-of-pocket government cost would be minimal.

But here is the rub. If we don’t adopt the approach used in Germany which was to create and maintain jobs at all costs, then there won’t be anyone to pay rent, mortgage payments or anything else. Housing prices have long been known to vary directly with median income, which in this country has been going down for over thirty years. The drop in median income was “offset” with credit, but we all know how that turned out. So the only way we are going to see our country survive as anything more than a banana republic is by raising median income through jobs programs, new business stimulus, small business loan liquidity and housing liquidity.

The neo-cons can scream all they want about how this is against American principles of self-reliance and small government. This is NOT an ideological question. It is a practical one — do we want recovery or do we want ruin?

FROM RICHARD WIDMARK (ANY RELATION TO THE ACTOR?)

I propose the Neil Garfield bottoms-up and top-down split mortgage options program.

Each underwater home owner is given the right to fix a fair value on his home.

The US Government will guarantee a mortgage on that homeowners own value with the full faith and credit of the US Government: I propose 5-year T-Bond rates for that underlying mortgage.

And then the US Government will give a lesser guarantee on a 2nd mortgage to fill the difference.

The rub: the US Government may condemn the property at will and on 60-days notice at the the price set by the homeowner. And third parties may force than condemnation procedure as well.

And in that fashion – homeowners will be very honest about their homes value.

Homeowners may adjust their value upwards if prices rise – as they will under this propgram.

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