Republican Debates Real Estate Rant: Herman Cain Harrasses Dodd-Frank. What’s Wrong With Dodd-Frank? “Mr. Dodd and Mr. Frank”
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Herman Cain is growing as my favorite Republican candidate (only when it comes to real estate, unfortunately we do not agree on several social issues) because of the smart remarks he has made in all the Republican debates about repairing our housing mess. Too bad he’s either (a) a bad boy, one of those men who thinks with his “second brain” or (b) being unfairly targeted by a few women. Maybe he’s just a smart-ass? When I was in TV News here in Dallas, the (overweight) weatherman once told me point blank that my butt was cute when I first got to Dallas from NYC, but was now getting too big i.e. I needed to exercise more. Is that sexual harrassment?
Here’s another smart observation from Bloomberg: we can fix the housing drag on the U.S. economy — and it is a real drag — by letting the market do it’s job. Bring on the vultures! I have long wondered why banks didn’t just write down principal balances on underwater loans. According to Bloomberg/Business Week, there are 11 million underwater mortgage loans in this country and that number will likely swell. But if we just reduced the mortgage balances on all those underwater homes, well guess what: the homeowners wouldn’t be so underwater. This might ultimately stimulate the economy with some spending:
“If the market were working properly, millions of homeowners would have received debt relief a long time ago. That’s because it’s in the interest of creditors, who can gain by averting foreclosure. Consider a delinquent $100,000 loan on a house that is now worth $60,000. After taking possession of the house and selling it, a lender typically might recover less than $35,000, according to recovery rates calculated by Amherst Securities Group LP, an investment firm based in Austin, Texas.
By contrast, a 50 percent writedown of the principal balance could make the loan affordable and give the borrower some equity in the home. In that case, the lender has a performing asset worth $50,000 — a $15,000 difference”
This is not happening, says Bloomberg, because of the way banks are structured, and the way mortgages are packaged and sold off to investors. This administration has taken “extend and pretend” to “delay and pray”. Let the vultures come in and buy off assets cheaply — find a way for the loan servivcers, who are holding a lot of the troubled loans, to dispose of them. In the cycle of nature, vultures may not be the prettiest birds but they play a significant role: they clean the streets and right now, our streets are filthy. Here are four proposals Bloombery offered up to hear from a presidential candidate, smart mouth or not:
1. Encourage Fannie Mae and Freddie Mac to build on a pilot program under which the Federal Housing Administration has auctioned almost $500 million in delinquent mortgages. Remember the RTC? It worked!
2. Give legal cover to servicers who sell loans, provided the sale price exceeds the expected recovery value, from investors who might feel shortchanged.
3. Allow servicers to sell loans that have been packaged into securities, even though trusts that hold the loans prohibit this.
4. Encourage the mortgage trusts to let servicers charge a small incentivizing sales commission.
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I will play devil's advocate: if Fannie and Freddie just write down the $100,000 loan to $50,000, they have just rewarded a homeowner who overleveraged, and the taxpayers are the ones who are footing the bill. Do we really want that? There is no perfect answer, and certainly we need to have compassion for anyone going through the terrible process of losing their house. But maybe lenders should reward the "vultures" by encouraging short sales, and the US economy might improve from there. Otherwise, at some point, bailing out everyone (both companies and individuals) from their bad decisions will just encourage riskier behavior in the future.
I will play devil's advocate: if Fannie and Freddie just write down the $100,000 loan to $50,000, they have just rewarded a homeowner who overleveraged, and the taxpayers are the ones who are footing the bill. Do we really want that? There is no perfect answer, and certainly we need to have compassion for anyone going through the terrible process of losing their house. But maybe lenders should reward the "vultures" by encouraging short sales, and the US economy might improve from there. Otherwise, at some point, bailing out everyone (both companies and individuals) from their bad decisions will just encourage riskier behavior in the future.
I LOVE when you play devil's advocate! Tell me this: how would the short sale be different from writing down a loan. In short sales, don't the banks take a reduction of the principal balance? I also understant that short sales are very complicated ya da ya da.
Well, under the plan that Bloomberg proposed, the seller is clearly being given a free $10,000 of equity, plus the opportunity to own a home at a bottom-of-the-market price. Why should they get this reward? Conversely, the seller in a short sale would no longer have the upside from the inevitable (albeit slow) housing recovery. And in addition, short sale sellers often have a deficiency judgment where they still owe the lender the amount that the lender had to "eat". So yes, the lender would lose their $50k in a short sale, but at least the lender (or the taxpayers, in the case of Fannie/Freddie) are not letting the seller totally off the hook for their bad decision and may actually collect if the seller has other assets or gains other assets. And we would be rewarding the "vulture" for investing fresh capital into this market. P.S. By the way, this should not only apply to the little guys, but to the banks/corporations that need bailouts. The fact that certain banks/insurers/automakers got bailed out without wiping out the value of their existing shareholders (including fat cat execs with huge stock options) and bondholders makes no sense either.
I LOVE when you play devil's advocate! Tell me this: how would the short sale be different from writing down a loan. In short sales, don't the banks take a reduction of the principal balance? I also understant that short sales are very complicated ya da ya da.
Well, under the plan that Bloomberg proposed, the seller is clearly being given a free $10,000 of equity, plus the opportunity to own a home at a bottom-of-the-market price. Why should they get this reward? Conversely, the seller in a short sale would no longer have the upside from the inevitable (albeit slow) housing recovery. And in addition, short sale sellers often have a deficiency judgment where they still owe the lender the amount that the lender had to "eat". So yes, the lender would lose their $50k in a short sale, but at least the lender (or the taxpayers, in the case of Fannie/Freddie) are not letting the seller totally off the hook for their bad decision and may actually collect if the seller has other assets or gains other assets. And we would be rewarding the "vulture" for investing fresh capital into this market. P.S. By the way, this should not only apply to the little guys, but to the banks/corporations that need bailouts. The fact that certain banks/insurers/automakers got bailed out without wiping out the value of their existing shareholders (including fat cat execs with huge stock options) and bondholders makes no sense either.
Very good. Also, I just thought of something. Whenever a loan is forgiven, that is considered taxable income by the IRS. So all that forgiveness in the Bloomberg piece would be taxable income. In the short sale I do not think it works this way, but again, I am not all that familiar… I've just texted Alicia Trevino who knows all about short sales.
Very good. Also, I just thought of something. Whenever a loan is forgiven, that is considered taxable income by the IRS. So all that forgiveness in the Bloomberg piece would be taxable income. In the short sale I do not think it works this way, but again, I am not all that familiar… I've just texted Alicia Trevino who knows all about short sales.