Commentary by David M. Michonski
RISMEDIA, Dec. 3, 2008-If we are going to solve our financial mess, we have to solve the housing mess. But to solve housing we have to get past our current way of thinking about it.
So what thinking do we have to get past? Currently, nearly everyone is focused on trying to bail out those in foreclosure, those with adjustable rate mortgages that are going to soar and those behind in their mortgage payments. Those solutions involve interfering with contractual obligations between lender and borrower (really dangerous stuff) and with reducing principal amounts on debt, with the taxpayer picking up the difference. It all sounds reasonable to do so until we think through the fairness issues.
We are stuck over fairness but it is not likely that we are going to solve the fairness issue especially the legal contractual issues. There are just too many questions. Why bail out people who might have been reckless? Or who lived beyond their means? How do we determine who is and who is not an actual victim? Are we to create a national panel to adjudicate fairness? The closest solution I have heard is that we just admit that any bail out is not fair but we need to do it anyway because it is for the “greater good.” The argument is that the taxpayers need to bail out a particular industry because if it were to fail it would hurt the greater good and that it is not acceptable to our society.
The problem with greater good thinking is it applies to everything, including GM, Chrysler and every other industry that makes up our economy. Too many of them are faltering and therefore would fall under “greater good” thinking. Such thinking thus puts us on a slippery slope. We have already used it for Fannie and Freddie, AIG and the banks and common sense says we have to draw a line somewhere. If we don’t, there just is not enough money to go around and the US may slip down the slippery slope into a black hole of debt that truly overwhelms us, devalues the dollar and leads to hyperinflation in our future.
What we need is something that is fair, stimulates the consumer, solves the problem and does not end up costing us a lot of money that we do not have.
To understand what that something might be, we first need to understand stimulation. Stimulation works better on healthy parts of the economy than on the sick parts. Just as with sick humans, the sick part of our economy requires not just stimulation, but often hospitalization, intensive care, blood transfusions, lots of care, months of therapy and more. In our case there is such a large sick ward that it will surely drown our resources.
But what if we could do something that stimulates the healthy and that in turn helps the sick get us over their housing flu?
I suggest we change our thinking to focus on those who want to and can be stimulated, i.e. those many people sitting with cash on the sidelines and who are just afraid to act at this point in time. The economy may be sick, but there are still plenty of healthy people around. We need something to stimulate them to part with some of the cash they are sitting on.
How? Simple: give the healthy sector of the economy a bargain they cannot resist. Americans like a bargain and will act upon them.
What is a bargain? Give creditworthy buyers a 4% 30-year fixed assumable mortgage with no prepayment penalty. Creditworthy is someone with 20% down or 20% equity in their home, who has good credit and a verifiable job. Make it a new loan or a refinancing of an existing loan. Simple enough.
Have those loans made through the mortgage brokerage infrastructure we already have and the banks. The banks can then sell them to our government through Fannie and Freddie. Give the healthy buyers a deadline of six to nine months to find a home and close on it before the program expires, thereby creating an urgency to act. Allow everyone to borrow up to the Fannie and Freddie limits that have been revised upwards.
Right now there are plenty of buyers in the real estate market who are out looking but are scared. Their hands are in their pockets and they are just waiting. Crisis after crises has taught them it is better to wait. To act, they need stimulation.
What our government can do today is create this urgency to act for the healthy members of our economy, a stimulation program that gets the many home buyers circling out there to get off the fence.
What might happen if we did this? Within 48 hours the healthy buyers would likely rush into the market to snap up the bargains by which they are now tempted. Those with existing loans above 4% or about to reset will re-finance and get onto a more stable footing. This will stimulate and unlock whole parts of the economy. It also will mean that many people will re-finance their current mortgages and repay their banks. That in turn will re-liquefy the banks that will now have cash to lend again. It is the engine that jump-starts the whole real estate sector. It helps to cushion or stop falling prices and it gets everyone moving again.
Instead of our current approach that gives money to banks and hopes they lend it to consumers, this approach gives money to consumers to refinance their mortgages which in turn allows the consumer to give the money to banks by paying off their existing mortgages. This approach gives money to buyers at a bargain rate to stimulate them to sop up the foreclosures and the 9 million homes sitting on the market right now.
This approach also avoids all the fairness issues. In fact, it solves them because it uses taxpayers’ money to partner with the healthy by giving them an incentive that in actuality helps the sick. Thus, it helps everyone. It rewards those who were not reckless and who were frugal and thrifty and it says to them, thank you, we want to give you a reward. We need your help to stimulate the economy now and we want you to take advantage of this program to help us to do so. Lend us a hand, won’t you?
What does it cost? Given the average home in the US is $200K, an 80% mortgage is about $160K. That means that for every 1 M homes sales we write under the program it costs the US $160B in mortgages. 2 M homes sales = $320B in mortgages.
But because the government owns these mortgages and can sell them, hopefully for above the 10 year treasury which currently is about 3.5%, the program may cost little or nothing. It is likely such mortgages would be snapped up because of the implicit government guarantee and because they are good mortgages made to healthy borrowers.
Indeed, if this government action stops the decline in housing prices, the value of the mortgages could even rise and costs associated with the program might be covered.
Recently, my colleagues at the National Association of Realtors and at giant Realogy Corp suggested that we buy down mortgages to the 4% to 4.5% area. This would work, too, but such a program costs the taxpayers the value of the buy down. It is another drain on the treasury and again leads to the fairness issues. Because the program suggested here does not subsidize the mortgages, but owns them, the government can sell the mortgages and recoup the taxpayer’s investment.
Henry Paulson wrote in last Tuesday’s Op Ed page of the New York Times that “more access to lower-cost mortgage lending is the No. 1 thing we can do to slow the decline in the housing market and reduce the number of foreclosures.”
Great. One way to do that is for the US to use its credit to provide such “access” via low cost mortgages to those who can respond to stimulation and whose actions will, in turn, help those who cannot.
David M. Michonski is the Chairman and CEO of Coldwell Banker Hunt Kennedy in New York City and a frequent commentator on housing issues.
Comments(2)