To: President Barack Obama
From: Jay Hill, Hill Mortgage Consulting
Re: “...Refinance Options for Troubled Borrowers...” (WSJ, Nick Timiraos, 9/6/11)
“Call for Investor Ideas for Government-Owned Foreclosure Properties” (WSJ, Nick Timiraos, 8/10/11)
Date: September 3, 2011
As a mortgage consultant on the front lines with work-a-day Americans mired in the quicksand of the financial crisis, I have a strong opinion with regard to a refinance plan viable plan for investor participation in managing rental programs for the glut of unsold homes-turned government property.
Currently, there are two micro-fix solutions floating around. One is for a government-backed mortgage refinance program that would allow millions of Americans with government-backed mortgages to refinance at a lower rate. The other is for a government-investor partnership in forming rental companies that share the monthly cash flow and potential equity from property sales. But realistically, the problem isn’t an interest rate problem—it’s an equity problem, and until we face the equity issue with a macro-fix we won’t see a floor in the housing market. Moreover, when Fannie Mae and Freddie Mac sell off their glut of government-owned “unsellable” homes, investors will purchase these properties in the most risk-free manner—which actually leads to more risk and/or loss for the government.
Example: A property has a $200,000 mortgage, with a current market value of $100,000. Any savvy investor will discount the current market value by 30-40 percent, reducing the purchase price to $65,000—a $35,000 loss to the government.
Furthermore, just as the investor discounts the property, the original homeowner views the property from a surcharge or premium to the current market value. If the loan was modified and the principle reduced to meet current market value plus a premium, the homeowner would view the same scenario from a standpoint of a 20-30 percent premium.
My plan has two options, both of which are voluntary for ALL properties, commercial and residential.
Option one is institutional: The lender writes down the principal to market plus 20-30 percent in the form of a first mortgage with a 30-year amortization 15-year balloon (payments are based on 30-year amortization but the loan is due in 15 years), then secures a non-interest bearing, non-accruing second mortgage on the property for the
remaining balance of the principle reduction. The second mortgage has a “trigger clause” stating that sale or refinance of the property within 15 years has a set balance equal to 80 percent of the equity. Equity would be established, if under dispute, by averaging three certified appraisals. This option requires the regulator to reword the capital requirements for banks and classify loans put into this program as something other than impaired.
Option two is governmental: Lenders write down the loans to market then submit those losses for a government subsidy equal to a portion of the loss. The government is then entitled to an 85 percent capital gain tax on all gains above the new principle balances. If the property sale doesn’t yield enough to cover the government’s subsidy, the shortfall follows the individual and is recovered through future capital gains.
If enacted, together these options could cure the moral hazard of strategic default and unclog the court system by reducing the number of foreclosures.