I have watched with great interest the way that the government is attempting to fix the housing crisis. I have read more laws and proposed laws and guidelines and possible guidelines than I ever believed could exist. I have read financial wizards explain the problem so cryptically that it is impossible to reveal the actual truths that exist. I have read the op-ed pages. I have talked with other agents. I have heard the whispered truth at the root of the problem. No one is talking about the truth.
Most of the talk has to do with derivatives. This is related to the bundling of mortgage “pieces” into something that can be bought and sold and apparently leveraged. This is a very convoluted scheme that has created a great deal of income for some and an impossible web of transactions to sort out. These derivatives may also be called “toxic assets”. The government seems to be doing all it can to sort out who is who and who owns what and who might be hurt and who might be made whole and ….well, you get the picture.
If investigators search through enough paper, the will figure out whose name is on which document. The problem is that it will take more time than we have to sort it out. Even if we could put a name on each transaction, we really do not have the time to research and analyze who was at fault (without any regulations in place, it may be impossible to assign fault that would stand a court test). As emotional as the issue has become, we are not in any position to be judgemental.
The problem must be fixed.
If we break it down to its most simple element, our problem began with the purchase of a home. The person buying the home was not really qualified to purchase the home. The person that bought the home, at some point could no longer pay for the home. The home became the true toxic asset. This happened many times in many areas and the subsequent spiral of home prices has left good solid neighborhoods staggering.
Why not fix the problem focusing on the root issue.
The current situation has homes foreclosed on and empty and becoming blights and reducing the surrounding property values. The longer they sit, the more their value goes down. As their value decreases, the homes nearby are impacted and their value decreases.
The other tale to tell involves homes that are going unpaid and are in the limbo between solid home ownership and foreclosure. Negative equity reigns.
Let’s address each issue.
The Federal Government has created several programs designed to stimulate the market. They are not addressing the problem. Rather than offering a $8,000 tax credit, it may be wiser to use another method to jump start sales. The tax credit may look like a give away that is a real plus, but it does nothing for the buyer that does not have the wherewithal to purchase a home. It does very little for the people that do not have a tax bill of $8,000. It seems to overlook the fact that in the first year of ownership, the bulk of a home owners mortgage payment goes to interest and that interest deduction may wipe out the need for the full amount of the tax credit.
It sounds great but has little substance. I don’t know about you, but most of the buyers I deal with need money now………..not next April.
Here’s a thought, why not address the foreclosed homes and log jam of buyers with one small action. Offer buyers that qualify for a FHA loan a interest free down payment assistance loan equal to 3.5% of the purchase price, when purchasing a foreclosed property or pre-foreclosure property (addressed in the second part of this plan).
The money would go directly to the lender. The money would be paid back when the home is sold or re-financed (or sooner if the buyer chooses to do so). The property would be priced according to a third party appraiser. The government would pay 50% of the first trust deficiency balance to the holder of the first trust. The holder of a second trust would receive 25% of the amount due on the second trust. Any subsequent trust on the property would receive 10% of the loss.
The buyer would be required to live in the property until such time as the 3.5% loan could be repaid or the property is sold. This would target the foreclosed homes and begin the process of reducing the inventory of toxic assets. If homes received this sort of treatment, we may see an end to falling prices which are at the bottom of the lost equity barrel.
The other problem we see is the short sale dilemma. Some happen, some don’t. The government needs to step in and pass a regulation that prohibits the owner of a property that is in a distressed sale position from proceeding with the sale unless they have sufficient funds to complete the transaction.
If they do not have the funds, a limited power of attorney must be provided to the holder of the first trust to enact the sale of the property. The holder of the first trust will negotiate with a Realtor to sell the property. The holder of the first trust will determine the asking price for the property through the use of the independent appraiser. Holders of second trust and/or other trusts will have no say in the final sale.
The government will subsidize the holder of the first trust 60% of the amount between the sale price and the amount of the first trust. The holders of subsequent trust will receive 10% of the money due them.
The homeowner will receive absolution from any tax consequences resulting from forgiven money in the transaction. The home owner will vacate the property once the power of attorney is signed.
Once again, we would be attacking the problem as it exists in the real world. Once again, we would be attempting to generate sales and stopping the plummeting home values. Both plans would generate activity.
Keep it simple, stop digging into derivatives and start putting home buyers into homes.