Stimulus-Relief for Home Buyers- YES, Relief for Holders of Sub-Prime Facing Default- YES

It seems likely that the new Congress and new administration will pass a major economic stimulus plan early next year. Everyone I know is hoping that a much needed HOUSING STIMULUS will be a part of that plan, hopefully signed into law in January.  Recently I've been  reporting and discussing plans put forward by NAR and NAHB, plans and recommendations to jump start the housing industry, to return demand to the housing market, and yes, put us real estate people back in business! Both are sweeping proposals and if adopted, in whole or in part,  will likely bring buyers back into the housing market in a hurry. Hurrah.

But these proposals are avoiding the elephant in the room.

Credit Suisse is predicting 8 Million new foreclosures in the next 2 years. Eight Million. If they are correct, that is one of every 7 American households- 16%, and they are predicting most of this in prime mortgages. with sub-prime defaults peaking in 2008.  That's right- the crisis that began in sub-prime is moving up the mortgage food chain. Why? Falling home values. Home prices have been predicted (absent a stimulus plan)  to fall another 18% this year...  Devastating? You bet, for the families, for the communities, and for Main Street. For us Realtors? You bet-- in a catastrophe of this magnitude no one will be let off the hook, and we are not faultless. Even today, many folks with good credit and good jobs are making an arguably rational economic decision walking away from their $800,000 loans on homes now worth $600,000.

If the nation wants to rebuild the housing sector, any plan must stop the slide in home prices and reduce that 8 million number dramatically. I know the arguments about personal responsibility- I understand them, I've taught them to my children, and agree with them, to a point. But we've authorized 700B to prop up major banks, figuratively covering the colander with our hands, but our financial system can not handle 16% of the mortgages non-performing. We need to look at how to keep the majority of these people in their homes, paying their mortgages, and stimulating demand to stop the price slide.

There has been a group of companies that have sold credit in predatory ways to the less educated, to the under informed, to the young and yes to many minorities. You know the companies- the fall under the 'pay Day loans",  Rent -To-Own (buying with 30%, or more, interest), the credit card companies that send those dozens of offers to your non-working college student- and then if they are late on one payment, their rates are jacked-up to 28%, and for decades the home improvement industry has targeted the less educated with high cost home improvements at low monthly payments. Predatory mortgage loans have been rising in rural areas and urban area. Many have prepayment penalties- so if the creditor has cleaned up their credit they still can't get out from under this loan.  I wouldn't care if this industry was wiped out- but they too have mortgages "securitized" by Wall Street.

Clearly, not all sub-prime loans were predatory. And yes the government initially pushed sub-prime to help more people to be able afford their own home. But Part 2 of the sub-prime mess began just a few years ago when Wall Street injected mortgage "jet fuel", the credit default swap, that increased demand of these securities in 2004, 2005 and 2006. Every day Wall Street demanded more and more of these loans.   This led to nearly 1 in 3 mortgages originated in 2006 being sub-prime, up from 20% in 2002. The motivation? Higher returns.

Worse, as many as 50% of the sub-prime applicants  2004-2006, could have qualified for conventional conforming loans. I had one client in the last several years- offered a 30 year fixed rate FHA loan, with no money down ($6000 in seller concessions negotiated) she took a loan, from "a friend," a 2 year adjustable note that had payments of about $50/mo less, and had closing costs of you guessed it, $6000. 

So we have to fix sub-prime mortgages, keep people in their homes and stimulate new demand all at the same time. Not to push prices backup, just as a back stop prices to keep them falling any further.

If anything like 8 Million homes go into foreclosure, lenders will stop lending, the real estate industry as we know it will be over, American families will be robbed of their wealth- and in the process, destroy the American dream once and for all. 

It is a risk I don't want to take.  But the tough nut remains- how to fix these securitized mortgages in a way that keeps people in their homes, and distinguishes from the home owner and the speculator. More on that next time.