Scott Miller's Welcome to the Jungle Blog Part III

Well, as I see it the Government has given the banks lots of access to money, as well as shored them up with cash to ensure that we did not have a cataclysmic collapse of the banking sector. Agree or not with that it happened and lending did not increase. If anything it decreased and the banks held the money close to their chest and invested it to raise their own value not their customers. Now we are sitting with around 22% or so of all homeowners owing more that what their home is worth. Worse in the hard hit areas like NV, AZ, and FL but the average nationally, and we have and unemployment rate problem +9%.

The two big drags on the economy are housing and unemployment as described in this article in the Wall Street Journal Housing Lift Proves Fleeting “The reports highlight two critical drags on the economy: a broken housing market and mediocre employment gains. This summer's fears of the U.S.'s slipping into another recession appear to have ebbed, but businesses and consumers are bracing for a slow, extended economic-healing process……………………………………While the housing market has regained some ground—existing-home sales were up 11.3% in September compared with a year ago—foreclosure properties are weighing on prices, and high unemployment is breeding caution and keeping some buyers on the sidelines……”

The reason the housing lifts are fleeting are because the underlying problem is not being dealt with. The way they are trying to stimulate the economy is by providing those folks that really do not need or do not want to refinance their rate or by a home in the first place. For some people that would love to refinance to the lower rate or sell cannot do so because they are underwater. How do we fix that?

So let’s say that we were to set up an insurance pool that could be funded with the fines the banks are paying for settlements on their bad foreclosure process to start with add in the remainder of what funds HAMP and HARP and the bailouts, that did not work, Like the program in this article to help unemployed avoid foreclosure $1B foreclosure aid program ends with $568 million unspent . We take these funds and use them to refinance all of the homeowner’s loans to the current rate with one addition. We also refinance their loans to the current value of their homes worth. YES FORGIVE DEBT. If there is more money needed in the insurance pool lets kick start the economy with the $4 trillion on the sidelines in cash that could be put to use by allowing that money to be invested into this insurance pool with a guaranteed rate of return.

The Government is already floating a similar concept, but to a limited degree as seen in this article in the Wall Street Journal New Mortgage Plan Floated. “State and federal officials are pushing a plan that could help some "underwater" borrowers get refinancing assistance in the latest government bid to break a legal impasse with big banks over alleged foreclosure abuses and ease problems in the housing market.“

So in this proposed plan the homeowner that had a house that was upside down and could not sell or refi now has that ability to do so. The qualifications for the refinance should be based solely on ability to repay and not on credit as some people have lost jobs, been downsized, or have had huge wage reductions and have paid the price with their credit. This principle reduction refi has one condition to the homeowner, if the value of the home goes up to a certain level they have to split the difference in a capital gains tax that goes to the insurance fund to cover the losses that were forgiven at the time of the refinance. This way the homeowners would get the ability to now move if they needed to and sell the home for what it was valued at and not have to go through the agonizing feet of short selling which takes months. Or they would have an enormous amount of freed up monthly capital and the new found freedom of not being so upside down in their home that they can’t breathe.

For those of you screaming your home is paid off, good for you, and if you help these people who were not as wise as you and they start consuming again, because they can now sleep at night and feel like going to a movie they may help pick up some of the tax burden. As well they may help a few people become employed out there as they put money to work and create demand. Also it will stop the steady erosion of people walking away or losing their homes to foreclosure driving your home prices lower. Check out the article Home Forecast Calls for Pain and a quote from the article “Economists, builders and mortgage analysts are predicting the weakened U.S. economy will depress housing prices for years, restraining consumer spending, pushing more homeowners into foreclosure and clouding prospects for a sustained recovery.” And this Costar article Housing Prices Unlikely to Recover Before 2020 While the housing sector will almost certainly gain strength during the next nine years, many bankers clearly believe prices will remain depressed for half a generation. This puts the devastation of the housing crash into perspective."

On top of that, by doing this they lift the economy up allowing stocks to rise so your 401K might actually grow. Novel Concept!

So then how do the banks share holders fair? Well the bank in doing the refinance let’s say write down a loan on a home that had a loan of 400,000 and is now worth 280,000. That 120,000 of written off debt would be submitted by the bank doing the refi to the bond holders who then submit to the insurance department making a claim and being reimbursed. Kind of like when they foreclose a property and claim their insurance money for the defaulted mortgage. This is then issued to the bondholders making them whole and passed along to the bank to ensure they do not have to impair the loss. Would you rather pay for $120,000 or $400,000? And that is if the homeowner doesn’t throw up the red flag file for bankruptcy and then the tax payer picks up the whole bill.

The homeowner is now making payments at the current rate in the 4’s on a 30 year mortgage on 280,000 reducing their interest payments monthly by around $767, which they then can use to purchase food entertainment or other consumption products which adds demand a key component to hiring and adding tax revenue to the bottom line. One thing we are all looking for improvement in.

Now if this homeowner needs to sell they can do so without having their credit ruined and move to where there is a job. However, if the homeowner decides to stay in the home they would have to pay a capital gains tax of 50% of the gain to the insurance fund up to 400,000. Then after that $400,000 mark there would not be a capital gains penalty. Then the tax the rich extra could be looked at a little differently but that is another blog I will address later.

In the event that the homeowner has to sell and move they would not be penalized the difference either in tax or in deficiency judgment, as it would be like resetting the clock allowing the market to find a bottom. Everyone else who has a home would not have to see the loss of additional homes to foreclosure and erosion of additional equity because the unemployment rate gobbled up their neighbor. Also, we would not have to see the home value decline further, because the next door neighbor walked away. This stops the additional distress in values, as the unmanned home is under maintained and then sold for less than market value. This stops the dragging of all the homes in the area to lower prices