A potential solution to the United States mortgage crisis

[Nightstroker]

My father recently came up with a potential solution to the mortgage crisis. RWG is a diverse community; I value the knowledge and intellect of its members and look forward to reading your responses, criticisms, and suggested changes to my fathers idea. We live in Las Vegas NV., and the solution could possibly be repeated throughout the USA.

The proposed solution:

Las Vegas has a large number of foreclosed homes, abadoned homes, and homes in the beginning stages of foreclosure. Nevada is the ideal city for the method described below.

The basic concept, is to move people who have lost or may lose their homes into a foreclosed home they can afford.

To make this happen, Las Vegas banks need to form a review committee of representatives from local banks and compile a list of all foreclosed, abandoned, and mortgage default homes in the area. Homeowners who have lost (or may lose) their homes would be contacted, and with their input, make a decision as to a monthly payment they can afford. The size/type of home that meets their needs would be determined. Then the committee would try to find another foreclosed home that meets the criteria. Obviously, it would be a lower priced home than their old one. If they find a home that meets the criteria, the homeowner would be shown the home (or homes, if more than one.)

At this point, the homeowner has two options. They can proceed with the foreclosure on their current home, or agree to move to the new affordable home and assume the mortgage.

Banks can encourage people in this process by: (1) letting them transfer the principle accumulated on their old home loan to the new home loan and (2) subsidizing part or all of the moving costs. In addition, the homeowner gets into a home they can afford versus damaging their credit rating and being forced to rent or leave the area.

Banks also benefit. Instead of being forced to sell foreclosed homes at big discounts to the original loan amount, or leaving them vacant until prices increase, they can fill them with new owners who can afford the mortgage.

This process, if successful, might significantly reduce the number of foreclosed and abandoned homes in the Las Vegas area. Both the homeowners and banks can join in this win-win situation.

Questions or comments please!

[HauteHippie]

My father recently came up with a potential solution to the mortgage crisis. RWG is a diverse community; I value the knowledge and intellect of its members and look forward to reading your responses, criticisms, and suggested changes to my fathers idea. We live in Las Vegas NV., and the solution could possibly be repeated throughout the USA.

The proposed solution:

Las Vegas has a large number of foreclosed homes, abadoned homes, and homes in the beginning stages of foreclosure. Nevada is the ideal city for the method described below.

The basic concept, is to move people who have lost or may lose their homes into a foreclosed home they can afford.

To make this happen, Las Vegas banks need to form a review committee of representatives from local banks and compile a list of all foreclosed, abandoned, and mortgage default homes in the area. Homeowners who have lost (or may lose) their homes would be contacted, and with their input, make a decision as to a monthly payment they can afford. The size/type of home that meets their needs would be determined. Then the committee would try to find another foreclosed home that meets the criteria. Obviously, it would be a lower priced home than their old one. If they find a home that meets the criteria, the homeowner would be shown the home (or homes, if more than one.)

At this point, the homeowner has two options. They can proceed with the foreclosure on their current home, or agree to move to the new affordable home and assume the mortgage.

Banks can encourage people in this process by: (1) letting them transfer the principle accumulated on their old home loan to the new home loan and (2) subsidizing part or all of the moving costs. In addition, the homeowner gets into a home they can afford versus damaging their credit rating and being forced to rent or leave the area.

Banks also benefit. Instead of being forced to sell foreclosed homes at big discounts to the original loan amount, or leaving them vacant until prices increase, they can fill them with new owners who can afford the mortgage.

This process, if successful, might significantly reduce the number of foreclosed and abandoned homes in the Las Vegas area. Both the homeowners and banks can join in this win-win situation.

Questions or comments please!

A couple comments...

So, you're saying, for example, if someone has payments on a $500K mortgage that they can no longer afford after their adjustable teaser rate expired and their house is now worth $250K they might be willing to move in to an already foreclosed home that was mortgaged at, say, $300K and assume those payments, right? Here's a question, then... Why would anyone be motivated to assume mortgage payments on an asset that is now worth a fraction of what that mortgage was originally drawn at? The house that carries this $300K mortgage is now worth $200K or less. So nobody is going to want to make the overpriced payments, even if they can afford them. One of the big subprime debacles was that asset appreciation was factored in to the mortager's income. In other words, if houses were steadily appreciating by $25K a year in your neighborhood then, according to lending standards, that would be future wealth created for the mortgager which could be used to make the higher payments after the adjustable loan reset. I.e. if your salary was $50K then simply by owning this house, you'd be getting a 50% raise. Because owning a house was supposedly a zero-risk money-making proposition. But, of course, this never accounted for a crash and never accounted for people refinancing all their equity out in order to buy swimming pools, plasma TVs, boats, RVs, etc. So I just can't see how assuming high payments on a relatively worthless asset that can no longer generate income for the mortgager would be be appealing. These people never cared about credit ratings in the first place, or they wouldn't have gotten in over their heads. Secondly, foreclosed homes generally require complete remodels. A very high percentage of them are completely gutted and trashed. The ex-owners even rip out the copper pipes - literally anything of value in the house - before they're kicked out. Third, the Freddie Mac / Fannie Mae bailout is essentially going to reset mortgages to values people can afford and give money to the banks to get all the debt off their balance sheets. So, foreclosures are almost going to become a non-issue. In fact, we're almost at the point where there's no need to continue making mortgage payments because you simply won't be foreclosed on anyhow. So you might as well just stop making payments, live in the house you have now for free, and wait for a better deal from the government. Sure beats moving into a smaller house with less cool stuff that's under water and may never be out of the red again in this lifetime. Of course, in reality, it's a horrible plan. The government should not be doing this. And it's just going to make things much worse in the future....

Now, just so you know, I like the idea a lot more than the plan that is being implemented thanks to Congress. Your dad's plan doesn't reward irresponsibility nearly as much, and doesn't punish those who actually saved money and bought homes they could afford with conventional loan products. But I just think there are too many reasons why it can not work in the real world.

*sigh* Kinda depressing.

[phaedo]

I think chieftang has put forward most of what I would have said on the matter also. On the surface without much background analysis it sounds like a plan, and one that sounds like a lot of thinking has gone into it, but not on the opposite side of the debate so to speak.

[fakemaster]

It would work if the people who were forclosed on hadn't been irresponsible to begin with.

[Nanuq]

Chief said it very well. The biggest problem with the proposed solution is that government NEVER operates as efficiently as a free market. Therefore a better solution is one where government is not involved.

If the government was involved in forcing the banks to make risky loans, for whatever reason, it has been demonstrated that the government does emphatically not know as much about legitimate risk and opportunity for loss, as a lending institution.

What is dramatically needed here is a large dose of personal responsibility. That will fix it.

If the banks are responsible for their own well-being with no outside pressures to make loans, then they have demonstrated they know how to do so, profitably.

If a homeowner is responsible for his/her good or poor choices, then they have a motivator to learn from their mistakes.

The obvious answer is to remove government from the equation and let the market seek its own level. Certainly it will be horrendous for 6 months or more. But then there's all this cheap real estate laying around, and what happens? The buying spree begins all on its own.

When it doesn't hurt, people make stupid choices. When there are no repercussions, there is no downside to continue making stupid choices. Let it hurt, and people will learn. That includes the banks and the buyers.

Besides, bottom line is... where in the Constitution does it talk about the government's role in taking this on? It's not there. You can read it for yourself, starting with the 10th Amendment: The Constitution

[cornerstone]

There's actually an easier way to accomplish what you propose - since what you describe is what would ordinarily happen anyway, but for the credit rating.

If a family has their home foreclosed on, or they hand the keys to the bank, they need somewhere cheaper to live. The cheaper, vacant, foreclosed home is available. They would go and live in that home anyway, if they could get the credit on it.

So the easier way to accomplish what you suggested would be to relax credit rules for people with bad credit ratings....

Except....that's kind of how the mess started to begin with

[HauteHippie]

Chief said it very well. The biggest problem with the proposed solution is that government NEVER operates as efficiently as a free market. Therefore a better solution is one where government is not involved.

If the government was involved in forcing the banks to make risky loans, for whatever reason, it has been demonstrated that the government does emphatically not know as much about legitimate risk and opportunity for loss, as a lending institution.

Right. When Freddie/Fannie were quasi-governmental agencies they (supposedly) had government oversight. That government oversight was so effective that they went bankrupt, and now that the government has assumed even more control we're supposed to believe that they'll act responsibly? Truth be told, I think an even bigger problem with the resetting of mortgages to lower levels than the rewarding of irresponsibility is that it absolutely screws those who did act responsibly. Let's say you have two neighbors living side by side in their 4 year old tuscan style track homes that they purchased at the same time for the same price... One guy saved money so he could put a down payment on his house and took out a 30 year fixed mortgage. He's working hard, making his payments, and his house is now worth far less than he paid but he can afford it. The next door neighbor couldn't actually afford his house, so he took out a subprime loan. After the first year, he refinanced and cashed out his $50K of equity which he used to put in granite counter tops, travertine floors, a jacuzzi, a swimming pool, and had a "media room" installed. Well, now he's under water and can't afford the payments after his rate went up because he never could have afforded the house under sane lending practices in the first place, and because he further increased his debt obligation by leveraging himself even further when prices went up. So what does the government do? They come in and lower his mortgage allowing him to keep all that stuff (freebies), while the responsible next door neighbor who didn't use his equity to upgrade his house and toys and didn't get a deal from the government to revalue his mortgage is now making higher payments than his neighbor on a far less fancy house that is much further under water because he was being prudent, exercising restraint, and acting responsibly all along!!?? It's absolutely backwards and mind boggling...

[HauteHippie]

There's actually an easier way to accomplish what you propose - since what you describe is what would ordinarily happen anyway, but for the credit rating.

If a family has their home foreclosed on, or they hand the keys to the bank, they need somewhere cheaper to live. The cheaper, vacant, foreclosed home is available. They would go and live in that home anyway, if they could get the credit on it.

So the easier way to accomplish what you suggested would be to relax credit rules for people with bad credit ratings....

Except....that's kind of how the mess started to begin with

Yea. It's the same, but different. The difference under your plan would be that they'd have a mortgage on the new house at current market value instead of a mortgage on the market value from 3 years ago.... But, yea, bad plan to put irresponsible people into new loans by relaxing lending standards. Fact is, those who can't afford homes need to go back to renting and lending standards dramatically improve. And sadly, the real solution is to just let there be pain for a while.... i.e. don't manipulate the market and let the crash and the recession take its natural course.

[Nanuq]

AMEN, Chief. Perfect example.

Let it crash, and crash hard. Then the people who have been responsible all along will be surrounded by opportunities. As they should be.

[stratcat]

The trouble with this plan, and with many others I've heard, is that the guy who buys what he can afford and makes his payments on time, gets screwed. Does the phrase "redistribution of wealth" ring a bell?

[Pugwash]

Solution to the mortgage crisis? Abolish all debt. Hit the big reset button. Solon did it thousands of years ago and it ended slavery in ancient Greece.

Is it fair? No. Is it a solution? Yes.

Are you after a solution or are you after trying to judge people on whether or not they deserve to be where they are? That's the big problem.

Trying to find a fair solution is very hard, and somewhere, someone will always feel hard done by.

My solution would be to fine the irresponsible bankers; take everything they own. Trickle-down failed, try something new. If you truly believe in a capitalist free market, let it crash and crash hard. Consequences are consequences; let them happen. Fiddle while Rome burns and get ready for the rebuild.

Ok, maybe not.

The problem was people bought houses and not homes. Screw the value, get somewhere to live, not an investment.

[Pugwash]

Does the phrase "redistribution of wealth" ring a bell?

Yes, it's called tax. It's called a police force. It's called road building.

Spending money is redistribution of wealth. It's not the evil you were told it was.

[Raijor]

The trouble with this plan, and with many others I've heard, is that the guy who buys what he can afford and makes his payments on time, gets screwed. Does the phrase "redistribution of wealth" ring a bell?

Nobody is getting screwed by helping out other people. The guy who buys what he can afford and makes his payments on time looses nothing. Nothing is taken away from him. You assume that life is a zero sum game. It is not.

I agree with Pugwash..hit the re-set button and start over. Wealth and exchange have become nothing more than zeros and ones in the computers of the world. Goods and services are exchanged for changes in the zeros and ones in computers either by handing over pieces of paper that represent some amount of purchasing power or by direct computer changes in the bank balances of the exchanging parties. When was the last time you made an exchange using an actual commodity such as gold, silver or even precious stones that you personally handed over to another person in exchange for something? I have never done it and have been in business for over 25 years. Those days have not existed for a very long time.

The world economy is nothing more than the mass hallucination of the world's population that actual wealth exists. If we all agree to start over it starts over. Why do things have to be so difficult? Kudos to Pug for making the point. Hit the re-set button fast and end the suffering.

[dluddy]

Chief, you nailed the issue

Nanuq is right, it is not in the Government charter nor are they good at running things like this - you can't deny history.

The video game generation thinks you can just hit the reset or "Do-Over" button....that is not how life works - this is not second life and we are not avatars

I'll redistribute my own wealth, thank you

We need a redistribution of "Responsibility"...........................................................................

.... back to the people

[HauteHippie]

Chief, you nailed the issue

Nanuq is right, it is not in the Government charter nor are they good at running things like this - you can't deny history.

The video game generation thinks you can just hit the reset or "Do-Over" button....that is not how life works - this is not second life and we are not avatars

I'll redistribute my own wealth, thank you

We need a redistribution of "Responsibility"...........................................................................

.... back to the people

In the real world, the reset button costs trillions and trillions of dollars and would usher in hyperinflation. Can anyone say "Zimbabwe" ?

[Watchmeister]

Let's just hope we don't end up with the same cure as the Great Depression - World War II now III.

I would also point out that whether or not you like what has happened so far - we the tax payer now own the banks. Because there certainly is no equity value. I am still trying to understand the "free enterprise" flaw. Financial institutions were given more freedoms than ever in the 2000's (yes I have not forgotten the gov't's previous mandate to make bad loans to unqualified people) and the only survivors are the more regulated (lower leverage) commercial banks - sort of. The Lehman's and Bear Stearn's of this world had no business leveraging themselves up 30:1 so they could use other people's money to generate larger fees and pay higher annual bonuses. There were no penalties for those who did this. There is something so fundamentally flawed and I will be the first to admit I am trying to figure out what. In my heart of hearts I am a free enterprise guy but something went very wrong.

[HauteHippie]

Let's just hope we don't end up with the same cure as the Great Depression - World War II now III.

Yea, you'd think we could have learned a lesson by now, wouldn't you... Unfortunately that is too far removed and Paulson and Bernanke are taking us down the exact same path that caused the Great Depression, the difference being that this time we don't have a sound underlying economy as we did in the 30's. Very scary times, and I honestly think at this point the likelihood Zimbabwe-like outcome is roughly a coin flip.

[HauteHippie]

I would also point out that whether or not you like what has happened so far - we the tax payer now own the banks. Because there certainly is no equity value. I am still trying to understand the "free enterprise" flaw. Financial institutions were given more freedoms than ever in the 2000's (yes I have not forgotten the gov't's previous mandate to make bad loans to unqualified people) and the only survivors are the more regulated (lower leverage) commercial banks - sort of. The Lehman's and Bear Stearn's of this world had no business leveraging themselves up 30:1 so they could use other people's money to generate larger fees and pay higher annual bonuses. There were no penalties for those who did this. There is something so fundamentally flawed and I will be the first to admit I am trying to figure out what. In my heart of hearts I am a free enterprise guy but something went very wrong.

Indeed! Now there's nothing wrong with greed just so long as people are gambling with their own money. But when they're gambling with MY money, I want some [censored] consequences for losing it. I'm a free market guy through and through as well, but I'm also a pragmatist. And aside from the government mandates to make loans to people who could not afford them, a huge blunder that resulted in the squandering of trillions was the deregulation of the derivatives market. The credit default swaps absolutely needed regulation just like the insurance industry because normal market feedback mechanisms don't work in those markets until disaster strikes, so now we've suddenly discovered astronomical counterparty risks and it's too late. Thanks primarily go to Alan Greenspan for this one.

[Pugwash]

One solution to helping with the crisis: Let GM fail.

http://blogs.law.harvard.edu/philg/2008/11...gm-go-bankrupt/

G.M. is in trouble, according to the latest news. The company has some contracts and other obligations that it can

[Nightstroker]

A couple comments...

So, you're saying, for example, if someone has payments on a $500K mortgage that they can no longer afford after their adjustable teaser rate expired and their house is now worth $250K they might be willing to move in to an already foreclosed home that was mortgaged at, say, $300K and assume those payments, right? Here's a question, then... Why would anyone be motivated to assume mortgage payments on an asset that is now worth a fraction of what that mortgage was originally drawn at? The house that carries this $300K mortgage is now worth $200K or less. So nobody is going to want to make the overpriced payments, even if they can afford them. One of the big subprime debacles was that asset appreciation was factored in to the mortager's income. In other words, if houses were steadily appreciating by $25K a year in your neighborhood then, according to lending standards, that would be future wealth created for the mortgager which could be used to make the higher payments after the adjustable loan reset. I.e. if your salary was $50K then simply by owning this house, you'd be getting a 50% raise. Because owning a house was supposedly a zero-risk money-making proposition. But, of course, this never accounted for a crash and never accounted for people refinancing all their equity out in order to buy swimming pools, plasma TVs, boats, RVs, etc. So I just can't see how assuming high payments on a relatively worthless asset that can no longer generate income for the mortgager would be be appealing. These people never cared about credit ratings in the first place, or they wouldn't have gotten in over their heads. Secondly, foreclosed homes generally require complete remodels. A very high percentage of them are completely gutted and trashed. The ex-owners even rip out the copper pipes - literally anything of value in the house - before they're kicked out. Third, the Freddie Mac / Fannie Mae bailout is essentially going to reset mortgages to values people can afford and give money to the banks to get all the debt off their balance sheets. So, foreclosures are almost going to become a non-issue. In fact, we're almost at the point where there's no need to continue making mortgage payments because you simply won't be foreclosed on anyhow. So you might as well just stop making payments, live in the house you have now for free, and wait for a better deal from the government. Sure beats moving into a smaller house with less cool stuff that's under water and may never be out of the red again in this lifetime. Of course, in reality, it's a horrible plan. The government should not be doing this. And it's just going to make things much worse in the future....

Now, just so you know, I like the idea a lot more than the plan that is being implemented thanks to Congress. Your dad's plan doesn't reward irresponsibility nearly as much, and doesn't punish those who actually saved money and bought homes they could afford with conventional loan products. But I just think there are too many reasons why it can not work in the real world.

*sigh* Kinda depressing.

Excellent insight Chief! Thank you for the response. My father will appreciate the read later tonight.

The purpose of the solution to prevent people from going into foreclosure by relocating them into a foreclosed house that they can afford.

If the monthly payments are based upon an outstanding mortgage that is significantly higher than the actual value of the house, then making those monthly payments does not make sense, as you have described.

Is it not possible to structure a home loan that is based upon the actual value of the home and not an outstanding balance?

Honestly, my father and I do not fully understand all the in's and out's of the realestate industry. Thats why we need input like this. The solution sounds simple, but perhaps simple is too good to be true.

I think that the bail out plan can work, as long as the money is used correctly and not for paying big bonuses to executives....crap like that. Congress should regulate how the money is being spent to prevent inappropriate use of the fund. Also, laws should be developed that prevent the crisis from happening all over again. Wouldnt that be typical if the government bailed out all these financial institutions and then they pull the same [censored] again once things are back to normal?

[HauteHippie]

Is it not possible to structure a home loan that is based upon the actual value of the home and not an outstanding balance?

Yes, anything is possible. But then the government foots the bill for the debt burden of the original mortgage and there's no reason to move into a different house... I.e. if they're going to revalue the mortgage on your house then you should just stay in your house. And this is precisely what they are going to start doing. $700B for the bailout is just barely scratching the surface.

[Watchmeister]

Indeed! Now there's nothing wrong with greed just so long as people are gambling with their own money. But when they're gambling with MY money, I want some fucking consequences for losing it. I'm a free market guy through and through as well, but I'm also a pragmatist. And aside from the government mandates to make loans to people who could not afford them, a huge blunder that resulted in the squandering of trillions was the deregulation of the derivatives market. The credit default swaps absolutely needed regulation just like the insurance industry because normal market feedback mechanisms don't work in those markets until disaster strikes, so now we've suddenly discovered astronomical counterparty risks and it's too late. Thanks primarily go to Alan Greenspan for this one.

Chief-

And here is the rub that I am still trying to think through. On the one hand the government regulated its way into hundreds of billions of bad loans while deregulating itself into trillions(?) of credit default swaps. And so regulation is needed some places and not others. Where is that fine line? How do we determine what institutions are critical. I wouldn't have guessed Lehman's downfall would have been as damaging as it was.

I do actually think we are in a position to get ourselves out of this mess. The most amazing part of this whole financial crisis is that we started this whole global mess and yet when there is a flight to quality the dollar is deemed to be the quality. The world is willing to take a 0% yield on U.S. treasuries just to preserve their capital. And we still are the largest economy (won't be next time though). For these reasons I am more optimistic and the U.S. givernment will once again spend its way out of this mess. And the world will eat up that paper because their own currencies are even more suspect. Anybody have a better idea?

[HauteHippie]

Chief-

And here is the rub that I am still trying to think through. On the one hand the government regulated its way into hundreds of billions of bad loans while deregulating itself into trillions(?) of credit default swaps. And so regulation is needed some places and not others. Where is that fine line? How do we determine what institutions are critical. I wouldn't have guessed Lehman's downfall would have been as damaging as it was.

I do actually think we are in a position to get ourselves out of this mess. The most amazing part of this whole financial crisis is that we started this whole global mess and yet when there is a flight to quality the dollar is deemed to be the quality. The world is willing to take a 0% yield on U.S. treasuries just to preserve their capital. And we still are the largest economy (won't be next time though). For these reasons I am more optimistic and the U.S. givernment will once again spend its way out of this mess. And the world will eat up that paper because their own currencies are even more suspect. Anybody have a better idea?

Capitalism works. And it is our way out of this mess. But it's not a quick fix, and in fact it's a long painful one given the hole we've dug.... But we won't go that route. Instead we'll run the printing presses 24/7 and inflate our way out which is going to set us up for an even bigger fall down the road.... The collapse of the dollar. Our economy is based 70% on consumer spending. But we no longer produce goods for the most part, and we have no savings. So instead we borrow to consume, and that model is an economic house of cards that can not stand up forever. The dollar rally that is underway currently is completely irrational, has nothing to do with the fundamentals of the dollar, and will not last for long IMO. Some of it, I agree, is based on perceptions of safety and stability. But a large part of it is due to deleveraging and redemptions, and those will come to an end. And some of it also has to do with some weak world currencies in the dollar index from countries that themselves are in peril. But in the long run, given the path down which we are heading, I don't share you optimism. In fact, I would say that most of the world will come to the realization that buying dollars - i.e. propping us up - is no longer in their best interests. All the manufacturing capabilities in the rest of the world are what will allow them to say to hell with the USA... In the long run they won't need us, and I think they're starting to realize that if they just let us collapse then eventually they'll be better off.

[rogerthat]

Just curious:

what would be the downside to offering 0 capital gains ona future sale for anyone willing to buy a house in the next 6 months.

Assuming banks are still lending you would get a ton of renters looking to buy and tons of investors pouring money into houses that might otherwise foreclose? Could solve the housing crisis overnight at least for 6 months.

What is the negative, future lose of money?

Sounds like at least a bandaid solution better than one I have heard yet.

Depends on the area I guess in my area the housing situation is not that bad, in Las Vegas it is.

Cheers,

M

[rogerthat]

Cheiftang,

I am actually very encouraged by the American dollar increasing in value as an American.

It may not last,but does it not prove that all the talk of the rest of the world not needing America and China & India becoming the next superpowers is hogwash.

It is still true that if America catches a cold the rest of the world catches the flu.

I think the dollar increase proves this, China looks worse than us right now economically as a result of the recent downturn. Without American spending other countries will fall and thus the world will do whatever they can so America remains strong.

Maybe I am just a naive American, I don't really know.

Cheers,

M