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Friday, March 06, 2009

Paying Homeowners To Be Responsible

Paying Homeowners To Be ResponsibleA few weeks ago, I wrote about how the Obama administration wants to let bankruptcy judges reduce both the interest rate and the principal (also known as a cramdown) for bankrupt homeowners who bit off more than they could chew. Now, the White House wants to pay homeowners for being good boys and girls by paying their bills. Here are a couple of clips from a WSJ article:

"...Loan-servicing companies will receive up to $3,500 from the government to participate, with the government also matching a portion of the lenders' costs, dollar-for-dollar. Homeowners will get as much as $5,000 apiece in federal money to reduce their outstanding balances, as a way to encourage them to stay current on the modified mortgages..."
"...Borrowers will have to sign affidavits attesting to their financial hardships. In return, they will see their interest rates drop to as low as 2%, their payment periods lengthened, and other modifications aimed at bringing their monthly payments to 31% of their income -- commonly considered a reasonable ratio. This program will be limited to first-lien mortgages with outstanding principal balances that don't exceed $729,750, in the case of single-family homes...."

I'm not a homeowner, but if I was, I would get a bit nauseous every time I read the above. As a renter, I still find it irksome. It's almost as though the smarts folks who are running the show have no understanding of the term "moral hazard."

But, then again, the housing situation is so bad that such measures may be necessary. After all, if all these struggling homeowners lose their homes, whole neighborhoods will decline, and when that happens, vacated homes will get trashed. Who is going to want to buy a home that's infested with rats, mice and roaches, and has had all the its copper plumbing stripped out? That's the reality of the American housing sector right now.

Exactly how many homeowners are underwater? Here's a clip from a Bloomberg article:

"...More than 8.3 million U.S. mortgage holders owed more on their loans in the fourth quarter than their property was worth as the recession cut home values by $2.4 trillion last year, First American CoreLogic said.

An additional 2.2 million borrowers will be underwater if home prices decline another 5 percent, First American, a Santa Ana, California-based seller of mortgage and economic data, said in a report today. Households with negative equity or near it account for a quarter of all mortgage holders..."

And here's the latest on delinquencies, from today's Mortgage Bankers Association press release:

"...The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 7.88 percent of all loans outstanding as of the end of the fourth quarter of 2008, up 89 basis points from the third quarter of 2008, and up 206 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.

The delinquency rate breaks the record set last quarter and the quarter-to-quarter jump is the also the largest. The records are based on MBA data dating back to 1972.

The delinquency rate includes loans that are at least one payment past due but does not include loans somewhere in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the fourth quarter was 3.30 percent, an increase of 33 basis points from the third quarter of 2008 and 126 basis points from one year ago. The combined percent of loans in foreclosure and at least one payment past due was 11.18 percent on a seasonally adjusted basis and 11.93 percent on a non-seasonally adjusted basis. Both of these numbers are the highest ever recorded in the MBA delinquency survey..."

Instead of borrowing and spending hundreds of billions of dollars with all kinds of convoluted government programs aimed at jump starting the economy, why not give every American household a prepaid credit card for $100,000. The idea seemed a bit crazy to me months ago, but it doesn't anymore. Bottom line:

  • It would cost less than all the government plans being implemented.

  • It would be fair, because every household would get an equal amount, including those who are already rich.

  • It would get Americans spending again, no doubt. The housing sector would be back on track in no time.

  • Corruption and wasteful spending wouldn't be an issue, since the money would go directly to the American people.

But what about inflation? Here's my plan:

  • As a preemptive move, the Fed would raise short-term interest rates just before the Treasury Department issued the prepaid cards. All quantitative easing and cheap money programs would end immediately.

  • Spending limit on each card would be set to around $5,000 per month with only one exception: consumers would be able to use more to make a down payment on a home, or to buy a home outright. Program would have a "use it or lose it" policy.

No spending on luxury items (luxury cars, boats, etc.) Eating out? OK. Investing in stocks? No problem. Want to buy new, energy saving appliances or install solar panels on the roof? Yes! Pay contractors to build you a new kitchen? Go right ahead! Use the cash to start a business? By all means! Want to send your problem child to a private boarding school? Start packing. Pay your taxes? Absolutely.

Let's take this idea to the American people with a referendum. Give voters the option of the above plan, or to continue with the administration's plans.

I'm a big fan of Barack Obama. I just don't like some of his administration's ideas related to fixing the housing problem.

As a final note, everyone should listen to the recent Bad Bank episode of the NPR radio program This American Life. It's really great (then again, this show is always great. I also highly recommend MarketPlace on NPR.) The Bad Bank episode contains a very compelling, private-sector solution to the housing mess. The program also explains why the banks aren't lending, despite having received billions in federal aid. Grab yourself a cup if coffee and enjoy.

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