Making Lemonade?

firsttimehomeowners.jpgContinuing to work through my “to-read” pile, I recently finished an article given to me by fellow Planning Commissioner Jim Herreid. It was the February 11th cover story of BusinessWeek, “Meltdown: For Housing, the Worst is Yet to Come”.

The article starts out with some frightful assertions, such as “Home prices could sink an additional 25% over the next two or three years, returning values to their 2000 levels in inflation-adjusted terms”. This drop would “put the national price level right back on its long-term growth trend line, a surprisingly modest 0.4% a year after inflation”.

The causes of the current situation are listed as lax lending standards, excessive home-equity loans, and lender losses on mortgages, mortgage-backed securities, and even more exotic derivatives. In addition to the drop in values, the symptoms include canceled home sales, home-loan delinquencies at a twenty-year high, and a cut back in real estate lending.

However, some people are already finding a silver lining. The Times of London ran a commentary titled, “Great news! House prices are down.” The author argued that the dropping prices made home ownership more affordable.

In a February 6th Wall Street Journal article, “As Houses Empty, Cities Seek Ways to Fill the Void”, the creative initiatives of municipalities are explored. “Among the strategies being considered to deal with the vacant housing are creating so-called land banks, floating bonds and raising private investment.” “Genesee County, Michigan, which includes Flint, one of the nation’s poorest cities, uses a “land bank” to control its vacant properties.” In Providence, R. I., the mayor’s office is working to have some of the foreclosed condo projects transfered to local community-development corporations, “which will then convert them into affordable housing and commercial space with the city’s financial help”. “In San Diego, a city and county task force is considering ways to buy empty homes – before speculators and investors swoop in – and reserve them for teachers, municipal workers and lower-wage workers, many of whom were shut out of the housing boom when home prices rose out of their reach.”

Northfield is proving proactive in these turbulent times too. The Housing and Redevelopment Authority is securing 14 acres at reduced prices to create approximately 60 units of ownership housing, targeted as starter homes, workforce housing and down-sized homes for empty-nesters. To hear more on this exciting project, listen to Locally Grown this Wednesday (5:30 pm on KYMN 1080 AM) when HRA staff person Michele “Mitch” Merxbauer is our guest.

13 thoughts on “Making Lemonade?”

  1. David, the mortgage professionals use a person’s (or combined family’s) credit score. If you pay your bills on time, your credit score is elevated. If you don’t pay your bills, your credit score is lowered. Credit score has nothing to do with income. However, when lenders had lots of money in the early turn of the century, they created “no doc” loans for high credit scoring individuals. They would allow buyers to “state” their income with no documentation required. Many of those buyers were able to buy houses priced far above what their income would sustain. But they did so, with the American dream of continuing price appreciation – 10 to 15% increase per year – and the dream of increasing income raises. When both of those factors reversed, some homeowners got into financial trouble. And many refinanced with the so called “no-cost” “cash-out” loans which paid off their high credit card bills/cars, etc. thrown into the home loan. Now, with home values dropping the homeowner finds they are in a upside down home value. Which means the value of the home is less than the amount of the mortgage and they don’t even qualify for a loan of any kind. Draconian hardly. But lousy debt management by consumers – yes.

  2. Larry – there is a remarkable correlation between how much money one has and the likelihood of paying your bills on time (credit score). For example – a very high percentage of Latinos in Texas were over the last decade being “granted” mortgages of up to 18% – usury for most of our nations history. And yes very lousy debt management ! What will be draconian is to come … attempts to enforce a collapsing debt structure. This is a very serious problem because those who put money out want to get paid back and those who owe don’t like servicing debt on an asset when it’s value drops below the loan value. A drop, as suggested above, of 25% would undoubtedly create a huge percentage of upside down home owners.

  3. Yes you are right David. And if those folks decide to walk away from their homes, which the banks will try to sell, then Ross’s Business Week story comes home to roost in Northfield. Many of these foreclosed homes become a blight on the market and in our neighborhoods. If the city Housing and Redevelopment Authorities have enough money they could buy up more of these properties. But, like the banks, cities and taxpayers don’t have the money to buy up all the potential properties that may be foreclosed.

  4. The “mortgage professionals” and the borrowers share a critical attribute–neither have nor had any skin in the game. In many cases, via the genius of collateralized debt obligations, the lenders don’t have any skin in the game either. As we come to find out, spreading the risk does not eliminate it.

    The real losers are the neighbors and the communties who have to deal with the blight of foreclosures and depressed home values (the latter, as has been already observed, is not so bad for potential buyers).

    The appropriate policy response should be directed at the communities–making capital available to local housing and development authorities to buy foreclosures at a “reasonable price”–the determination of which is the devilish detail in all of this.

    A public bailout of borrowers and lenders runs the risk of perpetuating the hazards created when the rewards of ownership exist without any risks.

    When appropriate risk is reintroduced into the equation, it will curtail much of the predatory lending practices. Genuine capital discipline–having real skin in the game–is a more effective regulator than legislative fiat.

  5. Lots of good comments. Larry does a very good job of explaining how the mortgage system works. It is always very easy to ‘create’ problems in a private capital system by trying to interject some level of social policy into the equation. But the bottom line is as Larry states….pay your bills on time, don’t over extend in all sorts of other credit areas and be honest in your income/expense statements and you will be just fine in a mortgage. That has always been the case.
    The problem boils up a bit when people turn to ‘creative’ solutions to things that are not realy problems. I serve on the board of directors for a bank and would never accept stated income documents for a loan approval. If you don’t have income tax records to support your income—best to try a different bank.
    Recently President Bush as been talking down attempts for the government to step in and ‘solve the mortgage crisis’. I hope he sticks to his statements and congress stays out of this arena. Too many of the problem mortgages involve investors that should not receive preferential treatment for their investment gone bad, or people that have used outright fraud to obtain mortgages. I recognize there are individuals that may be honestly be caught in a bad mortgage. But that is still between the lender and the borrower. They should work together to solve their individual mortgage problem.

  6. I agree, Ray. Bailing out people who cannot afford their mortgages perpetuates the problem.

    Moving people into a mortgage they can afford may be the answer–meaning lenders will have to get down in the trenches and work out their loans–for example, they take one McMansion as a deed-in-lieu of foreclosure in return lending the borrower enough to buy a lesser home that they may have recently foreclosed on–like dominos, these people (borrowers) need to move down to the home they can afford–and if we have a glut of oversized homes, so be it.

  7. The federal government is now taking over Freddie & Fannie to “make good on the implied loan guarantees” with taxpayer dollars.
    http://latimesblogs.latimes.com/laland/2008/09/obama-mccain-bl.html

    If any of our elected officials could demand a presentation of the bill language where “an implied guarantee” was voted upon then please do this. How could citizens of the US be expected to foot the bill for private lenders for what is now being stated as “10s of billions, maybe 100s of billions” (I read as a trillion plus) in loan defaults for an “implied guarantee.” Just how does a democracy “imply” something in law – maybe we need a national referendum to vote on what was meant by the “implication language” once this language is actually presented to taxpayers.

  8. David,
    The Bush administration has never felt the need to be restricted by legislative language up to now; why would you expect them to be any different on this?

  9. Patrick – I don’t have any problem with bemoaning the Bush administration. But understand, for example, that both the DNC and RNC “festivities” were funded to the tune $115 million by private special interests. What is happening, right now, is the government with bipartisan support is bailing out high risk lenders (those same special interests) with no real understanding of whether the bailout will work or the total cost to taxpayers. This is very very bad. This is not a simple case of the fox guarding the chicken coop – foxes are pulling up trucks to chicken coops all over America and feathers are flying while the trucks are being loaded up with chickens. Both McCain and Obama are watching and saying, “we trust the foxes and think they are acting responsibly… the head fox from Goldman Sachs has assured us this is a good plan”

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