Tuesday, December 4, 2007

If your Average Buyer could Legislate

Not sure if I am ready to handle any more drama. But here goes…...

Below are my suggestions for addressing (notice I didn’t use the word “fixing”) the housing mess. Many of these good ideas have come from commenters….I am merely trying to put them all together in a framework. Of course the best solution for us buyers is to let the market fully correct so that housing is affordable once again, but at least right now, that option is not on the table politically.

How to address the current situation:

1) Exempt first time homebuyers from the tax hit if they sell at a loss. If they end up foreclosing, give them a “free walk on their credit”. More flexibility should be given to first time homebuyers in terms of negotiating rate freezes and longer loan periods. A little more on the rationale behind this can be found here and here. We should not try and keep people in homes unless it actually makes financial sense to do so (financial sense for the borrowers, not the investors).

2) Second time home buyers, should only be eligible for loan period extensions since, in theory, they have a better understanding of the process and cannot claim ingnorance.

3) If a person took out a Home Equity Line of Credit on their house over $5000, (or refinanced for a larger balance) for anything other than vital home repairs (a leaky roof, or broken water heater) or other documented emergency (medical or funeral bills) they should not qualify.

4) Any Realtors or Mortgage industry folks, not allowed to qualify since they cannot claim ignorance.

5) Investors or persons with more than one home are not allowed to qualify as they are not losing their primary residence, or if they are, they have another home they can sell to make the payments on their current home.

How to prevent this from happening again:

1) Get rid of all the fancy mortgage products (not sure how to do this exactly). Or at least require the borrower be shown a worksheet of their income and how the fully loaded monthly payment (taxes, principal, interest, and insurance) compares at both the teaser rate and the reset rate. This documentation should clearly list out any fees and penalties associated with the mortgage product such as prepayment penalties. Have HUD collect statistics and create a web page, where buyers can enter their closing costs and financing terms. The website will compare their individual data to national, state, and local trends to see how their loan product stacks up.

2) Require borrowers to be sent all mortgage related documentation 2 weeks in advance. (I hated how closing is scheduled for 1 hour, and they make you sign all these docs you are seeing for the first time that are several pages long…Its obvious they don’t want you to actually read them. We had requested them in advance).

3) Restructure compensation so that RE professionals, like Agents and Mortagage brokers are not commission based (only fee for service) to help avoid conflict of interest as well as brokers peddling products they get higher fees for. I was once told that there is actual legislation related to Realtor commissions which is why they are so hard to get rid of.

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Separately, but related from the Washington Post (emphasis is mine)

“Until now, President Bush favored government restraint. But with investors losing millions as Wall Street banks write down billions of dollars in bad home-loan investments amid mounting concerns about economic stability, the White House is pressuring the mortgage industry to offer a sweeping fix for the problem.”

Commentary: I see, so he’s getting involved to save the investors. I guess those pesky homeowners are threatening his economy.

15 comments:

Patient Renter said...

"the best solution for us buyers is to let the market fully correct so that housing is affordable once again, but at least right now, that option is not on the table politically."

Some politicians are soundly for leaving the market alone.

"1) Exempt first time homebuyers from the tax hit if they sell at a loss."

Why? Sounds like selective taxation. I'd be for considering eliminating this tax altogether, but why should one group (first time buyers, value losers) benefit any more or less than another group?

"We should not try and keep people in homes unless it actually makes financial sense to do so"

If someone would be taking a loss on their home by selling, I'd guess that 99% of the time it doesn't make sense to keep them in their home. Renting is too big of a bargain right now. They'd be better off as renters.

"2) Second time home buyers, should only be eligible for loan period extensions since, in theory, they have a better understanding of the process and cannot claim ingnorance."

I'm not sure I like even giving them extensions for the same reason mentined above. If they're underwater and struggling, they're probably better off renting.

The other comments you posted were about not qualifying. I agree with these, though I'd maybe extend not qualifying to everyone. As for how to prevent this from happening again, I liked your comments.

Cheers.

Buying Time said...

I believe first time buyers deserve more leniency because they were the most vulnerable of all parties involved. Many of these people, rightly or wrongly believed the "buy now or be priced our forever" rhetoric. They are also the group with the least experience, and thus could most easily be taken advantage of by less than honest RE agents and mortgage brokers.

And yes most troubled homeowners are better off as renters. I don't dispute that fact.

Patient Renter said...

If leniancy were free, sure, I deal some out and I'd probably say that first time homebuyers deserve the most leniancy, or people who were scammed, etc. etc. Leniancy is not free though. Everything has a cost, some costs are just harder to see immediately. This reminds me of many arguments about socialism, which is maybe why you see the socialist political candidates (hillary) supporting a bailout.

Anyways, being that most of these folks are better off just losing there houses and given that leniancy for them has a cost for the rest of us, I don't believe there should be any leniancy at all. Our hearts tell us to help these poor people, but our intellect should tell us otherwise.

All just my opinions, of course :)

big n rich said...

These buyers should get nothing special at all.the homes should all be foreclosed on so prices can get back to reality.the govt wants prices high to keep tax revenue flowing and people spending via helocs.You have a lot of people who need homes who have been repsonsible and yet they were priced out by gamblers.First time buyers don't deserve jack shit.How about getting an education so they know what the hell they sign? We might as well start handing out more free money.Let the market correct here and quit trying to give these peole something as they deserve nothing but a kick in the ass.

Cmyst said...

patient renter --
"This reminds me of many arguments about socialism, which is maybe why you see the socialist political candidates (hillary) supporting a bailout."

Or, perhaps Hillary supports a bailout because she is a right-leaning inside politico who gets a lot of support from corporate interests?
News Flash: Hil is not the choice of the more left-leaning base of the Democratic Party. She (like Guiliani for the Repubs) is the favored candidate of the punditocracy, the media and the Beltway insiders.

There are a lot of issues on which the left is presumed to be sharing a huge group hug (vs. the right's marching in lockstep show of unity) that are actually far from clearly "left/right" issues.
The housing mess is one. Illegal immigration is another. NAFTA/CAFTA is yet another.
If you break all these down, somewhere in the murky rhetoric and emotional hysteria there's a common root: Big Business must have huge profits, be shielded from loss, and have access to a large pool of low cost labor. To me, there is nothing more revealing than the Fed's willingness to destroy the dollar so that Wall St. can keep percolating.

Gwynster said...

I'm with you Cmyst. Long time Dem, and HC isn't even on my radar. I agree on NAFTA (really bad idea) and most Dems I know do as well. This may be the first year I vote rebulican.... nahhh can't deal with them either.

There must be someone who is against illegal immigration, against subprime bailouts, wants us out of Iraq, and yet isn't socially conservative. The fact that there isn't anyone close to having a platform like that tells me that the current crop of canidates has no clue about who they are representing.

Patient Renter said...

"that tells me that the current crop of canidates has no clue about who they are representing."

Oh they know who they're representing.. it's just not always us:

http://www.opensecrets.org/pres08/select.asp?Ind=F07

Patient Renter said...

I forgot this one too:

http://www.opensecrets.org/pres08/select.asp?Ind=K02

Take note of any names NOT on that list. Some candidates do not accept money from lobbyists at all.

Gwynster said...

I see two not on that list but they also either support amnesty or are part of religous right. Those are both deal breakers with me.

Patient Renter said...

The two notable absent folks for me (Kucinich and Paul) are not part of the religious right. Paul is a social conservative, but he at least believes in Federalism as opposed to imposing controversial social laws at a national level.

Amnesty, I'm not sure about Kucinich. Paul is firmly against it.

Gwynster said...

Those were my two as well. Paul wants prayer in school, nuff said there but he may be my least awful alternative canidate. At least he was against NAFTA and pro legal marijuana (which I think we should tax like crazy to fund the national debt).

I love Kucinich but he has a pro-anmesty slant which looses my vote from the get go. Legal immigration reforms? sure. Amnesty for breaking the law? not in this lifetime.

Can't I just write in Gore?
/sniff

Cmyst said...

I'd vote for Kucinich if I wasn't so worried that HRC would get the nomination. A LOT of libs would vote for Kucinich if they weren't scared of HRC.

Now, be honest. Who do you think that bailout is REALLY for? An administration that wouldn't support an increase in minimum wage, that wants all of us to invest in the stock market for our retirement funds, that just can't support healthcare for poor kids -- and they have an epiphany when it comes to those pitiful subprime borrowers who are losing the American Dream?
Gimmee a break. They know that this is going to ruin the economy so badly that even their dubious positive statistics will not be able to spin them out of it.

Patient Renter said...

"They know that this is going to ruin the economy so badly that even their dubious positive statistics will not be able to spin them out of it."

Maybe they can get the Fed to print up some even greater dubious statistics. I hear the Fed is good at printing stuff ;)

Gwynster said...

Well, I think the bailout isn't going to make much of a dent except for a short morale boost for 2 to 3 months. The more of the language I see, less I am worried about it. It may help 7% of the subprimes written between 05-07 which is what, .3% of the total mortgage holders?

What it will do it solidify the concept that buying RE is not always a good idea. You could ask for better negative publicity on housing.

Sold in '05 said...

The only real way to ensure that housing prices are set by fair and free markets is to ELIMINTATE REALESTATE SPECULATORS FOREVER.

We need a MASSIVE (like 99.999%) tax on all profits from the sale of non-primary residences owned for less than a decade.

The ten year holding period would allow serious investors to continue to be landlords without adding "speculative froth" to the market. Exceptions should also be made for newly built homes that are being sold for the first time and for homes that are rehabbed under government monitored programs (to allow for redevelopment of run-down urban areas and such).

There is NO value added to the marketplace by speculators. They are pure parasites and have done great harm to our society. It's time to put a lid on them.