Choose Thinking: A Blog by Dan Gilbert

“For the strength of the Pack is the Wolf, and the strength of the Wolf is the Pack.”

- Rudyard Kipling

October 22, 2008

A Solution to the Housing Crisis, in Fewer Words

A few of you have asked for a summary of our Solution to the housing crisis to pass along to friends, family and other interested parties. So here it is — A Solution that Works in fewer words:

The Problem

  • At the core of the financial crisis is the housing crisis. The problems in the banking system are the “symptom,” not the “problem.”
  • Increasing supply due to foreclosures and less qualified buyers causes home prices to tumble downward, which causes more foreclosures, which causes prices to tumble downward even further…
  • The $700 billion bailout does not address this – it does nothing to forestall the tide of foreclosures. It also has the potential of administering random indiscriminate benefits to homeowners.

Can’t Have…

“Triple Witching Housing Syndrome”

  • Homes diving in value;
  • Uncertain and significantly increasing monthly payments;
  • Principal INCREASING with each payment (negative amortization).

Four Stakeholders’ Needs Addressed

  1. Homeowners in trouble
  2. Homeowners NOT in trouble
  3. Government and Taxpayers
  4. Investors/Owners of the Loans

Solution

  • Fix certain categories of loans at 30-year FULLY AMORTIZING subsidized low interest rates (4.5%-5.0%).
  • Eliminate prepayment penalties.
  • Offer double tax deduction for “writing off” any accumulated deferred interest (or negative amortization) currently on homes.
  • Affirm trustees’ of securitizations and servicers’ ability to modify loan on behalf of entire securitization.

Outcome

  • Stabilizes home prices and stops fall in home values for ALL homeowners (including those not in trouble).
  • Does not FORGIVE a dime of principal (very important for stability of home prices).
  • Allows homeowners to STAY in home with fixed affordable payments that amortize principal (light at end of tunnel).
  • Gives investors higher odds of recovering their investment in these loans/securities vs. expensive foreclosures and resale in declining spiral of housing market.
  • Can be implemented in a very short time.
  • Costs the tax-payers a fraction of the cost of the $700 billion bill (approximately $50 billion to subsidize the lower fixed rate).

Click here to download the PDF version of the Summary so you can print and share it with friends, family and others.

Posted by: in Real Estate & Mortgage, Your Money & The Economy | Comments (3)


3 Comments »


  • Comment by Jeanne Tubb — October 23, 2008 @ 2:17 pm:

    Similar to my ideas:

    HOW TO QUICKLY STABILIZE THE HOUSING INDUSTRY AND SMALL BUSINESS – PROBABLY FOR LESS THAN $700 BILLION.

    The Federal Government has “purchased” shares in several large financial institutions. The money has come from the taxpayers.

    If every financial institution in which the government has invested, or has not invested, but is using the Fed’s discount window for funds had the following requirements, the housing market would quickly stabilize and disposable income, what there is of it, would be put into circulation. Small businesses would become more stable, and large businesses would be able to better plan for head count and capital requirements.

    THE VERY SIMPLE PLAN:

    Any institution using the Fed’s Discount Window for funds needs to readjust ALL home loans/mortgages at 2% above the discount window, and ALL business loans at 3% above the discount window. These rates must be kept stable for at least 18 months, preferably 24 months.

    Cons: The financial institutions and some other large investors and idealists will say this is constraining the free market; they will say that financial institutions should charge more interest for high-risk loans.

    Reality: The financial institutions are receiving regular repayments from the stable (low-risk) borrowers, but these borrowers are becoming rapidly destabilized by the affected job and housing markets. The creditworthy, low-risk borrowers are being put at enormous risk by losses in jobs and portfolios and erosion of value in their houses and businesses. The propped-up financial institutions are also taking losses as foreclosures or full write-offs, causing the housing market and businesses to become unstable in terms of valuations.

    The “Bailout” gives preferential treatment to those who made bad financial decisions, and leaves those who are responsible and creditworthy making mortgage payments with higher interest rates to pay for institution’s losses. The follow-on effect has also left the creditworthy battling with possible job cuts and decreased housing and investment portfolio valuations.

    Pros: Practicing a pure “free market” approach is not part of the Bailout strategy, therefore, the use of the Bailout funds should benefit the majority and not just those who are pulling down the entire structure. If all mortgages and business loans were reset at a low rate of interest, and held for 18 to 24 months, the great majority of home and business owners could make their payments. Borrowers would know where they stand financially for a period of time and be able to stabilize their situation. The financial institutions would not be taking such deep losses on loans that cannot be repaid. Although the financial institutions would not be making a higher profit on the diminishing number of borrowers who can pay a higher interest rate, the financial institutions would have a more predictable cash flow and would become more profitable than if they were writing off large chunks of loans and had a lot of unmanageable and unquantifiable risk (as they do now).

    Once the general population feels they can predict their cash flows, the housing and business markets would stabilize. People would start to have and spend disposable income, which would have the classic trickle-down effect. After a period of stability, controls can be diminished and lending money can be assessed more intelligently (than previously!) in the areas of risk and reward.

    Simple, but effective. This plan benefits those who have been creditworthy, gives a chance to those who have made poor decisions in the past.

  • Comment by Shiv Bansal — January 30, 2009 @ 5:02 pm:

    A simple solution will be to buy partial equity in the homes of troubled borrower – Example: Mr A has a 200K loan on a home, bought for 200K. His monthly payment is 1200 which he can not afford now. He can not sell the house in today’s market.
    Govt. comes in and is ready to buy 50% equity in his house at an economic value which they asses say at 150K. They pay Mr A 75K and allow him to occupy the complete house rent free for next few yrs. He repays a part of the loan using $75K from the govt. and new payment is $700 which is affordable. Now borrower is happy as he gets to live in the same house at half the monthly payment. Lender is happy because exposure is reduced and there is a greater chance that borrower will make his payments current. Govt. is happy because they invested in real estate at economic value and there is a chance that investment will appreciate with time.
    In the above example a $75 billion investment can help 1 million families.

  • Comment by Eric — August 9, 2009 @ 8:28 pm:

    This DOES NOT address the problem …it is ONLY a band aid as is the stimulus plan. The problem with the housing market is NOT that people need a better mortgage or cheaper payments. The vast majority of loan modifications still result in foreclosure.

    There is ONE GUARANTEED WAY TO STOP FORECLOSURES…..SELL THE HOUSE.

    THE PROBLEM IS NEGATIVE EQUITY…AND THE FACT THAT RENTING IS CHEAPER THAN BUYING AT CURRENT PRICES.

    If a person has a home that they bought using little or no money down, or they recently (last 3 or 4 years) did a cash-out refinance at a very high loan-to-value, and now they are $50,000 UPSIDE DOWN, where is the value in struggling to keep this home?
    You cant sell…and you will have no equity for the next 5 to 10 years.

    Why not go into foreclosure or file bankruptcy and go a YEAR without paying ANY housing payments, then RENT for 3 years until you can qualify for another mortgage in a healthy market?

    The ONLY solution to this problem is to ELIMINATE negative equity…PERIOD. “Write down” these loans….REDUCE PRINCIPAL and bring the housing market to equilibrium.

    The housing market is totally stagnant because houses CANNOT SELL if they are upside down. HOUSES HAVE NO VALUE TO THE OWNER WITH NO EQUITY.

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