New proposal to help underwater homeowners

Today or tomorrow all 50 states are expected to sign off on a $37 billion settlement with Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial that will provide compensation to homeowners who were harmed with nefarious foreclosure practices. 

This deal between the big banks and the states’ attorneys general will result in mortgage principle reductions, refinancing at lower rates and cash to the wronged homeowners.

While this is good news for those who suffered and will give some help to the economy from an influx of money at the local level, we need to help the rest of the underwater homeowners in this country and put the final nail in the coffin of this down-economy.

In his State of the Union address last month President Obama said:

I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates. No more red tape. No more runaround from the banks. A small fee on the largest financial institutions will ensure that it won’t add to the deficit, and will give banks that were rescued by taxpayers a chance to repay a deficit of trust.

But with the GOP in Congress unlikely to allow any Obama-proposal that will help improve the economy before November, a New York Times editorial proposes another path to helping homeowners struggling to pay mortgages while invigorating the new housing construction market.

According to the editorial the Treasury Department can, without Congressional approval, give stronger financial incentives to Fannie Mae, Freddie Mac and private banks to help homeowners by reducing the principle on underwater home loans.

If a politically paralyzed Congress is not going to take action to accelerate our economy by reducing foreclosures and thus jump-starting the home building industry, then the Administration must do what it can on its own.

White House hears calls for action

I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates. No more red tape. No more runaround from the banks. A small fee on the largest financial institutions will ensure that it won’t add to the deficit, and will give banks that were rescued by taxpayers a chance to repay a deficit of trust.—President Barack Obama, State of the Union 2012

A lot of people, including me in my blog on Monday, have been calling for the President and Congress to take strong action to stop the housing foreclosure crisis not only to keep hard working American’s in their homes but also to revive the housing construction industry.  Last night President Obama indicated that he has heard our message and will challenge Congress to force financial institutions to allow “responsible” homeowners to refinance at today’s rock bottom interest rates with “no questions asked”.

 That’s great news.  But now we need to see the details of the plan.  How are “responsible” homeowners defined?  We need to include as many homeowners as we can, not just ones current in their mortgages.  And we also should include investment properties not just owner-occupied housing.  It hurts the economy and property values just as much went a rental unit occupied by a working American is kicked out of the house they rent due to foreclosure. 

The bigger issue is how do we stop the big banks from killing the idea in Congress?

On Monday I said, “It is time for these private banks to give back to the country for bailing them out.  The profits they’re reeling in now wouldn’t exist if it wasn’t for the taxpayer.”  Last night the President said the program “will give banks that were rescued by taxpayers a chance to repay a deficit of trust.”

 But I doubt that our calls for the big financial institutions to grow a conscience will be effective.  That's why we must all push hard against the upcoming lobbying effort to stop this plan.  Tell your member of Congress to support the President on this issue.

A needed message in State of the Union address

One of the issues we are expecting to hear about in President Obama’s State of the Union address tomorrow night is the housing crisis.  Economists tell us that the nation’s economy won’t dramatically improve until the housing market stabilizes and demand for new homes gets back on track.  That’s how important the housing construction industry is to creating jobs.

But that industry won’t be coming back for a while if there is no effective action taken by the federal government.

As I pointed out last October, according to an analysis by McClatchy Newspapers, at that time there were 2.2 million homes whose owners had received initial foreclosure notices or notices of default but hadn’t yet been foreclosed on.  Another 1.9 million properties at that time had owners who were 90 days or more behind on their payments but hadn’t yet been served with foreclosure notices.  That’s 4.1 million homes that are soon to be put into the foreclosure bucket.  To put that into perspective the official number of all houses for sale in the nation is only 3.5 million.

The drum beat for the President and Congress to take strong action to solve this crisis to boost our economy has been growing.  Last week 27 Congressional Democrats from California asked for a meeting with the President after meetings with top Administration officials such as Tim Geithner failed to produce needed action.

For some time I’ve been advocating that we should “muscle the private banks and Fannie and Freddie to do everything in their power to keep the current home owners in their homes by letting them refinance at today’s rock bottom rates (no questions asked) and, if necessary, reducing the principle they owe.” 

There is a push in the House to have the government-controlled Fannie and Freddie write down mortgage principles for owners deep under water.  Federal Reserve Chairman Ben Bernanke wrote this month that “it might be worth the expense to lose money now in an effort to shore up the books of the government-sponsored enterprises for the long term while helping the economic recovery.”

But what about the big private banks of JPMorgan Chase, Citigroup, Wells Fargo, Bank of America, and Ally Financial?  The states’ attorneys general have been working since the fall of 2010 to have these financial giants help the homeowners they victimized by their earlier foreclosure papers robo-signing scandal.  However this agreement is expected to compensate only about one million homeowners with principle reductions.  That will be too late for many and a drop in the bucket to really help our economy.

It is time for these private banks to give back to the country for bailing them out.  The profits they’re reeling in now wouldn’t exist if it wasn’t for the taxpayer. 

A call for principle reductions and the lowering of interest rates for both public and private mortgage holders in trouble should in the President’s speech tomorrow night.  If he really wants to get the economy rolling sooner than later, this is the course of action we must follow.

Honoring Dr. Martin Luther King Jr.

A rally at the South Carolina State House to honor Dr. Martin Luther King Jr. is being held today.  At the same location just four days ago, hundreds attended another rally in support of an issue surely Dr. King would have approved—the promotion of homeownership for all Americans. 

Last week’s rally sponsored by the Home Builders Association, S.C. NAACP, Urban League and others organizations including the South Carolina Small Business Chamber of Commerce was to support homeownership through keeping the mortgage interest tax deduction and easier access to mortgages for qualified loan seekers.

Unfortunately, one reporter for a national publication mischaracterized those attending as “anxious homeowners” demanding “greater attention to housing problems, particularly the expected surge in foreclosures.” 

But while the reporter got it wrong, he did point out a major obstacle facing homeownership today—the glut of present and future foreclosures due to the great recession that are standing in the way of a revitalized economy and a reinvigorated housing industry.

The administration and Congress have failed to take adequate steps to address this terrible problem.  Now this same reporter says that the administration is looking at the issue again. 

We don’t need more talk.  We need immediate action by our elected leaders to take the same crisis-mode style steps that they did with TARP to bail out the banks.   Those are the same banks that are giving lip service to helping struggling homeowners stay in their underwater homes. 

The answer is not to just rush all the millions of homes yet to be foreclosed through the process as quickly as possible as one prestigious local home builder told me the other day.  To do so would result in property values falling through the floor making today’s prices look good.   This is what Mitt Romney has advocated to help all those who want to invest in cheap rental property but the human and economic toll on the rest of us would be catastrophic.

At a Bank of America conference last month featuring President Bill Clinton talking about the housing crisis among other issues the New York Times  reported the following:

“We’ve got to do something to clean these books up, and to do it in a hurry, in my opinion,” Mr. Clinton said. Stabilizing housing and dealing with foreclosures is vital for the entire economy, he contended. “I still think that’s the single most important thing we could do to loosen everyone up, go back to a free-market, full-employment economy and have the normal transactions occurring again,” he said.

Anne Finucane, BOA’s top image-maker, was on stage with Mr. Clinton and according to the story made this response, “Sounds like we need a workout deal.”

Really?  BOA and the other big banks are already trying to work out a deal with the state attorneys general for their bad subprime mortgage lending practices.  But all we’ll probably get is some homeowners getting their principals reduced.  That’s some punishment for an industry that as a whole is doing quite well thanks to the American taxpayers. 

The workout deal we really need is for the entire country.  Forget about “punishing” certain banks for past deeds.  We need to tell all the banks to take their mortgage losses on the front end of every homeowner in trouble by keeping people in their homes at all costs to avoid foreclosures.  If that means additional government help, so be it.

If we make this a national priority, property values will stabilize, demand for new homes will go up and our economy will revive quickly. 

And American families will keep their homes, their investments and their dignity.  Now wouldn’t that be good way to honor the life of Dr. King.

Romney's bad business idea

With all due respect to my friend SC Treasury Curtis Loftis who is the state chairman of the Mitt Romney campaign, the GOP Presidential candidate has the wrong business approach to the housing and foreclosure crisis.

In a recent interview with the Las Vegas Review Journal, Romney said that the solution to both the housing and foreclosure problems is the same—let home foreclosures “hit the bottom”.  Government should just get out of the way and let the banks foreclose as fast as they can.  According to Romney, investors would then buy up the highly devalued properties and turn them into rental units.  With all the foreclosures out of the way then the housing construction industry would get back on track.

Besides Romney being viewed as cold and uncaring toward all the families he quickly wants to put on the street and the current small investors in rental property he wants to throw under the bus, his approach is a pretty lousy business plan.  

Romney and I both agree that the current supply of housing needs to be stabilized with owners that can pay the mortgages.  Only then will new houses start being built creating the construction jobs we really need to lift the economy.

But Romney’s approach requires that all property values continue to decrease (even for people who continue to live in their homes).   Generations of middle class Americans and those trying to break into that category will never recover the little wealth they’ve accumulated.   As the middle class goes down so will our vibrant small business economy both from a lack of customers and their own foreclosure problems.

Here is a better way to stabilize the housing market.

According to a recent McClatchy Newspapers analysis:

-2.2 million homes whose owners have received initial foreclosure notices or notices of default but haven't yet been foreclosed on.

-1.9 million properties whose owners are 90 days or more behind on their payments but haven't yet been served with foreclosure notices.

That’s 4.1 million homes that are soon to be put into the foreclosure bucket.  To put that into perspective the official number of all houses for sale in the nation is only 3.5 million.

Romney wants the economy to wait until all these houses are foreclosed on and resold, a process that will take years and a terrible toll on most Americans and even the banks holding the mortgages.

But here is a better business proposal for our country and the banks, one that I’ve blogged about before.

Let’s muscle the private banks and Fannie and Freddie to do everything in their power to keep the current home owners in their homes by letting them refinance at today’s rock bottom rates (no questions asked) and, if necessary, reducing the principle they owe. 

The banks know that the value of their housing portfolios isn’t worth anything near what they claim on their balance sheet.  So let’s stop the charade and force the banks to write down the losses right now.  If they all do it together, it will be alright for all of them. 

We’ll keep 4.1 million families in their homes, stop the slide in real estate values and immediately create demand for new housing.  And it can be done a lot faster than Romney’s prescription. 

The Obama Administration is expected to roll out a plan in the next few days to help homeowners refinance at today’s interest rates.  We’ll see what the plan is but I suspect that it won’t take on the banks and force them to do what really needs to be done. 

The Administration and Congress to start kicking butt.

BofA should make an even better business decision

Bank of America’s recent announcement of its intention to eliminate 30,000 jobs over the next few years has caused some concerns in the bank’s home-town of Charlotte.  How many of the company’s 15,000 Charlotte employees will be affected we don’t know.  But if that community is worried today, just think of the panic there would have been in 2009 if the big banks had not been bailed out—the lost jobs would have been greater and immediate.

But now this “too-big-to-fail” bank has made the business decision to trim down to increase its bottom line. If only this business decision would be followed by an even better business decision for the bank and the country.

Nobody I have talked to in the mortgage business understand why financial institutions would rather foreclose on a house instead of working with the owner to save the mortgage.  It’s simply a terrible business decision for the lender. 

A foreclosed property, even if investor-owned, must be resold in order to recoup some of the banks’ losses.  But with a market glutted by foreclosed properties, the banks are losing up to 50% of the money they’re owed.  This in turn dramatically reduces the value on the bank’s other mortgaged homes in the same neighborhood leading to more defaults from underwater homeowners and more losses for the bank.

Foreclosing on a house is also bad for the economy that needs a revival in housing construction to get back on its feet.  But that won’t happen until the number of foreclosed properties is dramatically reduced.  Then there are all the previous homeowners who have now lost much of their personal assets.  These primary homeowners and investors won’t be contributing anywhere near as much to the increase in consumer spending we desperately need.    

Then there is the negative effect on families struggling to keep together. New research is showing the incidence of child abuse has risen with the recession. Foreclosing gone wild is not good for the nation’s economy or families.

If Bank of America is going to lose much of the value in the homes it has foreclosed on and all the higher interest the homeowner was paying anyway, then the no-brainer better business decision would be to simply cut the borrower’s interest to today’s low rates and possibly extend the life of the loan. This would keep most homeowners in their houses and investors in the game due to much lower payments.  Families would not be uprooted, neighbor property values would stabilize and there would be a demand for new housing construction. 

A small business person would easily make this decision—so should Bank of America.