Monday, February 23, 2009

A better housing stimulus proposal

Guest Perspective/Paul Halvorsen
This week we should hear about the rules and parameters of the housing bailout. I, for one, don’t hold out much hope that the two parties responsible for this mortgage mess – borrowers who over-extended themselves and lenders who made risky loans – will be held accountable.
It used to be that to get a mortgage two initial hurdles needed to be overcome. First, a borrower needed money for a down payment. Second, the lender verified the ability of the borrower to meet the financial obligations imposed by the mortgage. Over the last decade or so it seems that the regulators and, indeed, Congress (through lack of oversight), reduced, and in some cases eliminated, the need for both the down payment and a stable job. That brings us to where we are today – a concurrent housing downturn (where prices have corrected downward) and a mortgage crisis (where defaults are increasing).
Now, Congress and the President act. After two “stimulus” bills here comes mortgage assistance. I’ll bet a week’s pay that the taxpayers (that’s you and me) will be picking up the tab for poor decision making of borrowers and lenders with little or no protection afforded us. To avoid this great giveaway I suggest that there be in place a taxpayer protection clause. It’s a simple solution that puts the responsibility where it needs to be – on the backs and in the pockets of the irresponsible borrowers and lenders. Let’s look at the two step approach and the impact on taxpayers, borrowers and lenders.
The first step would allow individuals who are underwater on their mortgages, that is, owing more on principal than their house is currently worth, to do a one-time renegotiation of their loan with the current note holder to pay principal and interest on the newer lower amount. This would require the borrower to repay two mortgages. There would be a first mortgage on which principal and interest payments would be made and a second mortgage that would be in limbo until the house is refinanced, the first mortgage is paid in full or the property is sold (whichever occurs first). Under this step the taxpayer would contribute nothing to the transaction. The borrower would, however, get some relief while still being held to account for the purchase. More important to the taxpayer is the fact that we don’t subsidize a windfall profit for the borrower. How, you say? If a buyer receives taxpayer money to avoid foreclosure and is then able to remain in the home for a period of time and the home values climb to a point above the original purchase price you and I just added to his profit on a future sale.
Let me give an example: A few months ago Bob bought a house for $100,000 that’s now worth $50,000. Bob owes $75,000. Taxpayers subsidize the refinance to $50,000 for 15-years without taxpayer protection. Bob stays in the house for 15 more years and finishes paying his mortgage – all while the house value climbs to $125,000. Bob sells just as he finishes paying his mortgage and pockets the entire $125,000. Now let’s look at the numbers with some taxpayer protection in place.
A few months ago Bob bought a house for $100,000 that’s now worth $50,000. Bob owes $75,000. With taxpayer protection in place Bob executes a 15-year refinance with the lender. Bob now has two mortgages: a primary mortgage for $50,000 on which Bob pays principal and interest and a second mortgage that will be a principal repayment at one of the trigger-points I outlined earlier. Again, Bob stays in the house for 15 more years and finishes paying his primary mortgage. The value of his house climbs to $125,000. Bob sells (just as he’s starting to repay the principal only mortgage). However, rather than Bob pocketing $125,000 as he did with the subsidized mortgage he keeps “only” $100,000…the other $25,000 goes toward paying off the second (principal only) mortgage. Bob gets no $25,000 taxpayer funded windfall.
The second prong would allow the current mortgage holder, upon refinancing to a lesser principal amount, to hold both the primary principal and interest mortgage and the second principal only mortgage, ultimately collecting on the second principal only mortgage only when the refinanced principal and interest mortgage is paid in full, the amounts are fully refinanced or if the home is sold. Again, taxpayers would contribute nothing to the transaction. Indeed, the lender has an incentive to do this type of transaction to avoid foreclosure and the associated losses. This also will encourage lenders to self-regulate in the future – the loss of interest revenue on lenders would, in the aggregate, be fairly high but less than the carrying costs of keeping hundreds of foreclosed homes on their books and under their care.
This approach doesn't cost the taxpayers any money, helps lower the payments for homeowners while keeping them responsible for their investment decisions, gets the lender the initial principal and some interest (thereby keeping banks somewhat responsible for their poor lending practices) and ultimately keeps the taxpayer from subsidizing a windfall profit if a home is sold years down the road after the inevitable housing market recovery.
If taxpayer protection like this is not part of any mortgage bailout we really need to rethink who is leading our country. We, as taxpayers, can’t afford to keep paying higher and higher taxes to bailout those in the country that do not take personal responsibility for their contracts and business dealings and then line up for the government handout. We cannot afford to go the way of other countries that have become so “progressive” that workers ultimately pay the vast majority of their earnings in taxes.
Paul Halvorsen is Assistant City Prosecutor and a former city councilor. He lives in Concord.

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