Old Solutions for Today's Problems
Today, I read an article in the newspaper that said Congress had passed a bill asking the banks to rent out their foreclosed homes while they waited to market the homes for sale. The idea is that this will stabilize neighborhoods impacted by a high number of foreclosures. And, in doing so preventing further erosion in values.
On the surface this seems like a reasonable request. One well founded in reason. And, this is one possible solution to a concern certain to impact neighborhoods across the country.
However the real solution is not in a temporary fix like this. Instead, the solution is to see that these loans become performing loans once again.
Now before I go any further, I must say that the ideas, I am about to discuss are not my own. In fact, they come from Bruce Norris (of whom I spoke last week). As I said in my last article, I have a tremendous respect for Bruce. His understanding of our market borders on genius. And, having followed his projections for the past fifteen years, I know now that he is right far more often the not.
I want to first say that the banks currently do not have to record a loss on their books until they take the home to market. So, they can conceivably sit on tens of thousands of homes, each worth maybe up to half of the amount secured by deed of trust.
So when they finally do start taking these homes (rumored collectively to be in the millions) to market many banks will be severely downgraded in terms of their book value.
=but, what would happen if the foreclose homes started to perform again? This could happen by simply changing the way we handle the trust deed sale on the courthouse steps. Currently, the bank looks at what is owed on the property and what the home is currently valued at.
Then, they set a maximum loss the investor should take. And, so long as the winning bid (paid in cash) falls within these parameters, they allow the home to be sold. And in doing so assure themselves or their investor of a loss which will ultimately be reflected in their balance sheet. This process will repeat itself over and over again.
Now what would happen if instead of setting the opening bid at a guaranteed loss. The banks, set the starting bid at the cost of the payments in arrears and, any accrued interest and late fees. Now let’s take this one step further by saying that in curing the note the buyer now assumes the rate and terms of the pre-existing contract guaranteeing that the investor do not realize a loss.
Now let us take this one step further. In the seventies and eighties, we had this wonderful loan that was fully assumable with little or no qualification. This was a gift from heaven. Let’s say that I were a self-employed person who thanks to the generous write offs available to the average business owner, had plenty of cash flow but showed little income. And, let’s also pretend that you could no longer afford the payments on your home. You are endanger of losing the home.
I cannot qualify for your home even though I can afford your payment. And, you protect your credit by allowing me to assume your loan. It worked in the past. It certainly could work today.
I guess to coin a phrase that Bruce Norris used, we know what worked in the past. And, it certainly will work today. The economy of our nation, is tied (like it or not) to our housing industry. We need sensible, historically sound solutions to the problems we face.
If we want to know how to deal with the problems of the present, we need simply to reach for the very recent past.