Morning in Arizona

Morning in Arizona
Rainbows over Canyonlands - Dave Stoker

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Sunday, February 28, 2010

How to Successfully Rescue Residential Real Estate

There is a growing uneasiness amongst analysts, money managers, and pundits about the nonresponsive residential real estate market. Even the business media are lowering their cheerleading pom-poms to acknowledge the dismal data being reported. Something is amiss.

Sales of previously owned U.S. homes fell in January 7.2% following a December decline of 16.2%. The annualized rate of 5.05 million was at the lower end of estimates ranging from 5.04 to 6 million homes. Also, reported home prices for federal agency sponsored mortgages fell in December 1.6%.

New home sales were reported for January at a 309,000 annual rate. This was below the consensus low of 345,000. This followed a December drop of 7.2% to 342,000 annual home sales.

The Mortgage Bankers Association reported purchase applications dropped 7.3% for the week ending February 19 to the lowest level since 1997.

The S&P Case-Shiller HPI Composite 10 and Composite 20 each fell from 158.49 to 158.19 and 146.28 to 145.90, respectively.

These negative numbers were posted while first-time home buyers tax credits are still in force.

A year ago, last January, I wrote an article prescribing a simple bottoms-up solution to the housing crisis. The Obama administration chose a top-down big bank model, instead. Since the crisis is still with us here is my idea in a nutshell:

The federal government should self-refinance the original mortgages directly with homeowners at 4% fixed for 20 or 30 years, ultimately turning these mortgages into GNMAs.

The new mortgage then would be split in two, for the borrower. The lender would receive the entire mortgage amount due, thereby, eliminating one mortgage from existence. The home owner will now have a first mortgage for the current appraised value of the home. This mortgage becomes completely assumable with the home. The government recovers this portion when the GNMA is sold.

The difference between the original mortgage and currently appraised value, or the second mortgage, is applied to the borrower‘s income tax filing over 20 or 30 years. Each year, regardless of one‘s tax liability or credit, Uncle Sam is due 1/20th or 1/30th of this second mortgage. The borrower has the right to pay off the second at anytime, without penalty. This is the government’s only exposure in this transaction.

Investors and speculators are not eligible for this program. But, if they sell the property back to the family that was foreclosed upon and evicted, they could quote their total cost for the purchase of the property, plus any improvements made at cost, plus a nominal interest rate on their total outlay. Or, investors and speculators could ignore this program and keep these properties that do not have an assumable GNMA mortgage in a new real estate market place which does and is growing day by day.

This program could start with $20 billion. It’s cheap at twice the price. Fannie Mae (FNM) has borrowed $59.9 billion since last April. Fannie Mae will seek an additional $15.3 billion in aid from the Treasury after posting a ninth consecutive quarterly loss of $16.3 billion.

That’s the basic plan. Let’s tease it out some more. Fresh appraisals are needed. Many unemployed workers from the real estate industry could began earning money again as appraisers. Major home builders like Toll Brothers (TOL), DR Horton (DHI), Pulte Homes (PHM), or Lennar Corp. (LEN) could offer a recertification program like the luxury car brands. We have heard stories about homes being stripped and or vandalized before they were abandoned. Let the established homebuilders hire their laid off construction workers to make repairs or even upgrade houses - at the home owners’ expense. It may not be as lucrative as their old business but their old business isn’t coming back anytime soon and it puts people back to work, now.

For the home owner who refinances, he now has several hundred dollars extra each month to pay off other debts like bank credit cards (watch payment delinquencies fall), or make repairs to his home, or buy a new computer for the kids, or resume saving for retirement, or start saving for that vacation that’s been deferred again and again.

Primarily, what this would do is provide what is currently missing from real estate - a spark. Suggesting a real estate purchase in today’s climate is akin to kissing a beautiful stranger who is coughing with a “cold sore” on their lip. I insist, you go first.

Moreover, this plan does not require anyone to invalidate contract law, modify bankruptcy courts protocol, write off principal amounts on loans, antagonize CMO investors, and perform other unnatural acts in finance.

I could pose a half dozen philosophical or moral reasons not to intervene in this manner. As a practical matter, it’s possibly America’s last chance to save the larger middle class for the next generation.

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