Maryland and Virginia Real Estate and Homes Blog

BRYANT TUTAS ASKED:

• ‘Lenn, I wonder how much it would cost to write down all mortgages to market value? And it would have to be all whether they are delinquemn or not or it wouldn’t work. Let’s say a max of 95% of true value. Any idea?”

GOOD QUESTION BROKER BRYANT AND ONE I’VE THOUGHT ABOUT A LOT.

How much it will cost depends on how it would be done.  Selective write-downs at the hands of the mortgage companies is hardly fair.  Actually, I’m not sure the amount is as important as the formula for a government guarantee of payback by the mortgagor to the mortgagee.  A government backed mortgage insurance plan similar to the FHA loans or guarantee would be one idea.  Not something designed by the fools in Congress or HUD or Fannie Mae or Treasury.  

NO WINNERS OR LOSERS.  I’m thinking of a plan designed to insure the banks from loses from ALL defaulting insured loans and not picking and choosing the winners and losers.  To work, the plan would ahve to be universal and comprehensive.  However, what it would do is put all American home owners on an even scale and bring back the real estate industry, meaning purchase and sale of real estate, essential to the financial health of the US economy.   

By wiping out the artificial appreciations (2004-2005) that are now financed and defaulting left and right, folks who need to sell would be able to sell and folks who wanted to buy would be able to buy at affordable prices for home owner listings and not just foreclosures and short sales.  We could end the short sale and foreclosure boom and replace it with new real estate market driven activity.

NOT ALL HOME OWNERS DEFAULT.  MOST MAKE THEIR PAYMENTS.  However, the payments are causing the financial bankruptcy of a huge percentage of American families.  Once the mortgages were written down to an amount or percentage based on assessed value, or market value, the government would only have to insure the home owners that defaulted.  Surely not all home owners would default.  In fact, only about 10% would default based on defaults in the past for unemployment, etc. 

I’m not sure what the average write-down would cost, but I would estimate about $150,000 averaging loss of market value across the country.  Based on reported reduction of median home values it could be significantly less.  However, If 10,000,000 home owners defaulted, that would cost the treasury ONLY about $1,500,000,000,000.  $1.5Trillion.  It is surely a better formula for recovery than selective bank write-downs by foreclosure and short sales.  The government would have to insure the bank write-downs of only the defaults, which are going to happen anyway. 

CONGRESS HAD A WAY OUT AND REJECTED IT.  Don’t forget.  The market value of the homes has already been written down, by the market.  It is the mortgages that are still out of line with the market value.  When a home owner owes $50,000 or $150,000 or $250,000 MORE than market value, that home owner is held hostage to the house and the mortgage company.  They can’t sell.  They can only default and face short sale or foreclosure.  There was a proposal in Congress that bankruptcy judges be given the authority to write down mortgage balances to market value.  Congress didn’t pass that one.  No wonder.  Congress considers anything other than a small hand-out to the American tax payer a bad idea.  So, the home owner is limited to loss of everything with no way out of a home that they clearly cannot continue to sacrifice their financial life to support. 

I COULD LIVE WITH THAT.  What they’re doing now is going to cost that much and more.  Yet, the American home owner is not benefiting ONE SINGLE DOLLARby bailing out Wall Street.  I can hear a cacophony of outcries from folks who don’t believe that anyone should be rewarded for speculation.  Of course they shouldn’t.  However, not all home purchases by the American home buyer in the years 2004-2005 were speculation.  On the other hand, ALL SHAREHOLDERS AND CORPORATE EXECURIVES ON WALL STREET that managed the sale of securities for Mortgage Backed Securities were knowingly and deliberately speculating.  Yet, it is the Wall Street investors that are being bailed out and not the American home owner. 

The catastrophe ahead of us is inevitable.  The question is, whom do we protect, the Wall Street crowd that orchestrated this melt-down or the American home owner?