WARNING TO ALL AMERICAN HOMEOWNERS
Are you someone who has worked hard all your life now and own your home free and clear? Or are you a new homeowner who saved for a down payment and now own a home with a prime mortgage and some hard earned equity? Or are you are a credible subprime borrower forced to pay a higher interest rate because of a credit history that may even be incorrect and are now in trouble? It doesn’t matter who you are because it looks like there are forces at work in some areas of the investment banking community who are trying desperately to destroy the market value of your home in order to cover-up and justify questionable losses in hedge funds and other speculative strategies.
Wall Street investment banks and their supporting media are trying to convince Americans that current home values, across the country are the result of an unjustified run-up in housing prices. Therefore, according to their way of thinking, there was an unsustainable housing “bubble” which has just burst. While this theory of a housing bubble may be true in a few speculator driven markets, it is not true in most of the United States. By comparison, Internet stocks were a real bubble because of irrational expectations based on idiotic pro forma paper values and absurd pie-in-the-sky revenue projections. But almost all current housing values are the results of regional supply and demand, with price appreciation backed by appraisals, underwriting standards, and lender approvals at every step of the price appreciation. This alleged nationwide “bubble”, is it a fact or a Wall Street “red herring”?
What appears to be most disturbing is this unjustified attack on most American’s primary asset seems to be happening with the support of the Federal Government and the financial media. Something is dreadfully wrong here.
The American dream of home ownership, and the real estate market in general, must be stabilized and saved before we can address the clear and present dangers to our country associated with oil speculation, runaway food prices, (again the result of unconscionable speculation), credit card abuse, predatory student loans, credit reporting abuse and fraud, and most importantly, consumer confidence.
Yet, the focus of the Federal Government, the media and the current presidential candidates has shifted the emphasis away from the troubles of the American homeowner just when things are about to get a lot worse. More and more hard working, responsible Americans are falling further and further behind with no relief in sight, and nobody is working for them.
But, this shift away from “talking” about helping average Americans may be understandable because not a soul has come up with any viable plan for restoration of the housing market, protection of American homeowners and for assigning the real blame for this housing and consumer credit crisis to the proper parties. Why constantly remind Americans their financial well being is in jeopardy if you don’t have any idea of how to help them? No politician is that dumb.
How did a very small-alleged problem in the subprime mortgage market blow up to become this potentially catastrophic decline in housing values and consumer confidence? Can this deepening decline be stopped before we go into a depression? Money or credit doesn’t seem to be an issue since the Fed appears to be ready to inject liquidity wherever it is needed. The only question is, where is it really needed?
The origins of this current crisis are allegedly the collapse of two Bear Stearns hedge funds beginning in July 2007. But there have been massive hedge fund failures before and they didn’t lead to anything like this. In fact, prior hedge fund failures that involved playing games with the shares of General Motors, Morgan Stanley, Cablevision Systems, Gateway and others did not lead to the collapse in value of these companies whose stock was in play. So how did the failure of these two unregulated greed driven hedge funds start the collapse of the legitimate housing market? After all, homes have real intrinsic value; hedge fund investments are merely high-risk pieces of paper without any real intrinsic value except the expectation of huge profits. How were the losses on these “paper” investments allowed to extend to the underlying mortgages and even more astoundingly to housing values?
Were these funds shorted before the July 2007 collapse? Did someone or some “investment bank” start a public campaign to create the appearance of a collapse in the alleged housing “bubble” with subprime defaults as the cause in order to justify the write down of these so-called investments?
How come there has not been any indication of an upcoming investigation by the Federal Government? Not one word by any Federal official.
Our government, not the housing markets, has told Americans that their homes are grossly overvalued and that they must pay the price for unbridled speculation. On Friday, January 18, 2008, Treasury Secretary Henry Paulson stated in part that the housing market; “… needs to correct. It's we've had unsustainable growth for some period of time.” Really? Says who?
Is it possible short sellers have driven down home values by shorting the mortgage backed securities markets? According to data released by the magazine Trader Monthly on Monday, April 7, 2008 and reported on the MoneyNews.com website the 2007 payout, for one trader was $3 billion or $26 per every American household. Another trader shorting the same market netted himself a $1.5 billion payout. Again quoting the MoneyNews.com website, “Hedge funds often promise to make money in all markets by using tools, such as shorting, that are off limits to other money managers”. If energetic use of this set of tools had the unintended consequence of potentially destroying the accumulated wealth of American homeowners, then something is drastically wrong with this practice.
What I don’t understand is how do you devalue investment-grade mortgage bonds without devaluing their collateral, (right word?)? Who initially decided, “housing prices should decline on a national level”? Did Secretary Paulson know about this shorting of the market on January 18, 2008 when he graciously slapped the average American homeowner across the face?
Assuming that shorting the mortgage backed securities markets is legal, and then making it work by claiming housing is overpriced, and by assuming the Feds were aware of it, doesn’t it follow that there were at least some unintended consequences here? Look at it this way; the Feds crucified Martha Stewart over $50K. Surely a payout of over four and a half BILLION DOLLARS to just two of the traders in this field should have gotten someone’s attention!
In any event, how do we get out of this catastrophe in the making? Obviously neither Wall Street, the banking industry, nor the Feds are going to do it. They all may have good intentions, but they also have too many conflicts of interests to act on behalf of the average American homeowner.
The country needs a plan to resolve this crisis that works in the interest of all parties, investors included, and the plan should do as little damage as possible. A “plan” is basically defined in one-way as “a method for achieving an end”, according to Merriam-Webster’s Online Dictionary”. So, for what it’s worth; here’s one.
The “ Liberty” Plan:
So, here’s a new idea. It’s a little complicated and I think can really help, that is assuming it is a valid plan to restore consumer confidence, revitalize the housing markets, stop foreclosures and help people keep their homes. I’m not trying to make an argument here, so I’ll lay out the ideas behind the plan first, and then try to explain where they came from and why they just might work.
Two things: First, any solution has to involve time – this is going to take time to restore confidence and fix housing. Second, it has to be focused on ALL homeowners fairly. It is immoral and unethical for the Feds or anyone else to help the subprime borrower at the expense of the prime borrower. The crisis has now put millions of homeowners with prime mortgages “under water” on their home equity – that must be addressed and remedied.
Here are the details – subject to modification of course.
Generally speaking, the basis for this plan is literally to put everything on hold for 24-months as I’ll explain below. Do it so that assets are protected and no one loses any mortgage principle or invested interest and no more foreclosures – just stay static for 24-months.
No more “write downs” in the billions, if no security interest is going to be lost (hopefully) - no need to take these absurd losses. Here’s how.
Immediately convert every mortgage and home equity loan to a 4%, 50-year, fixed mortgage! No prepayment penalties, no balloon payments nothing but a straight 50-year mortgage. After 24 months allow rates to rise one-half percent, per year, if the market justifies it.
Why “every mortgage and home equity loan”? Because this crisis in the housing market has been allowed to spread so that it adversely affects virtually every American homeowner unjustly, and any plan has to cover all homeowners. The Liberty Plan does not involve any taxpayer monies going to one class of borrowers at the expense of others, but does offer relief and protection to all homeowners while the Government decides to investigate this situation. The only ones who pay a short-term price here is the lending institutions and the investors in these speculative investments.
But while the rate of return is cut, the principle is protected while an orderly resolution is found. If the housing market can be stabilized for the next 24-months there should be no reason why investors should lose their money. Investors are consumers also, and restoring their confidence is critical to our financial markets. The Liberty Plan calls for an equitable protection of their assets just like the American homeowners. All you have to do is look at the debacle involving the over 22,000 investors that owned $490 million in unsecured investment notes issued by American Business Financial Services, (Pink Sheets: ABFIQ.PK), now bankrupt to see why this is critical.
Immediately halt all foreclosures for the next 24 months, add the delinquent amounts to the principal of the mortgage, apply this new interest rate and 50 year amortization, and give people a chance to work things out. This should stop the flood of more distressed properties from coming on the market and further destabilizing the housing industry. This should stop cold the future “resets” that are going to be the final blow to housing and consumer confidence.
Disregard Sinking Home Valuations: Since home prices seem to double every 10 years and this is a long-range program, the underlying value of homes should increase once the real estate market is again stabilized. Set appraisals at current market values based on the established system of “comps”. Since the potential for upside vs downside is greater, this should work. This should stop the need for the “mark to market’ write downs.
These proposals alone should help restore considerable consumer confidence right away.
As to other important details, once the bleeding is stopped then the experts in the field can work these out. Some examples:
New mortgages: Allow only 4%, 50-year fixed mortgages to be written for at least the next 24 months. After 24 months allow rates to rise one-half percent, per year, if the market justifies it. This should help sales and revitalize the real estate market especially new construction, which is the key to jobs and economic growth.
New Mortgage money: I honestly don’t know how to attract investors to this new mortgage lending, but until they come back it seems like the federal government could make money to lend available to banks under the same format they are using to help investment banks.
Proposed Tightened Mortgage Lending Regulations: Here’s a new idea! Let consumer banks set their own lending standards under flexible programs based on factors such as LTV’s, credit scores, income etc, and let the consumer banks evaluate the character issues.
New Mortgage Serving Guidelines: Simply put, you originate the mortgage; you service it.
Insuring Consumer Bank Solvency: Capping interest rates for the next 24-months may create bottom line problems for legitimate consumer banks. Instead of giving billions to investment banks, why not use this credit facility to support cooperating consumer banks if they experience real losses during this period?
Forbearance to Sell: At any time within the next 24-month period allow those who can’t afford to stay in their homes a one-time 12-month forbearance to sell rather than foreclose. This should further stabilize prices by keeping these distressed properties off the markets.
Real Estate Commissions: For the next 24-months from enactment, fix single-family owner occupied real estate sales commissions at 4%. Brokers can also contribute their share to help combat this housing crisis, which is a clear and present danger to our country. Believe it or not, some brokers are greedy and might take advantage of this potentially robust market.
A Mortgage is a Contract: I know that mortgages are contracts. Mortgagor has the responsibility to maintain his/her property and to make the payments in a timely fashion according to the terms of the contract/mortgage. Question is, do mortgagees have to make a good faith effort to maintain the overall value of the real estate market by not jeopardizing the stability of the financing markets? – if I have the terms correct. By participating in these hedge fund schemes have mortgage lenders breached their obligations under the implied doctrine of good faith? It will take time and a sincere investigation by the banking authorities to determine this.
Action Plan: What is needed to get consideration and enactment of this plan is a nationwide telephone, fax and email campaign directed at every member of Congress calling from them to PLEASE act IMMEDIATELY! The campaign must be overwhelming, consistent, and continuous, and not stop until Congress acts. American homeowners need their help. For now, ask politely and firmly.
Hi Bill, I have never heard of this solution, "The Liberty Plan", and I believe it is a great one. It appears that no one in the government is truly looking to help the little people like myself in the midst of this financial fiasco. I would like to get this solution out to as many people as possible. With this being an election year one would think that politicians who are running for office would be taliking about this national problem on a daily basis and talking about a real solution. That's not the case here in the state of Montana where I live. I know an individual who is running for leutinent governor here that I will be passing this on to as well as making the call to congress as soon as I find out what number to call. This would tremendously help me in my current situation as well as many americans. I have one more year before my "CountryWide" adjustable rate mortgage goes out of control.
I take responsibility for my actions in decision making when it came to the choice of refinancing, but I was ignorant to the fact that I was being taken advantage of when securing that loan. I felt like something was wrong when the "mellinium mortgage" rep. worked hard to convince me that this deal was a benefit to me when I considered backing out because the loan was not tailored to my request. Thank you for the infomation prior to your solution. It was eye-openning.
Posted by: Will | June 08, 2008 at 07:57 PM