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HOW (AND WHY) TO SAVE THE HOUSING MARKET
The mentality of the speculative investor is inconsistent with buying residential real estate. I am now officially old enough to start sentences with “I remember when….” And I do remember when a house purchase was predicated on the assumption that you would live in it and no one ever asked about “price fluctuation.” We actually didn’t “expect” price appreciation and didn’t expect a decline either. There weren’t too many folks around back then (70’S) that understood inflation and certainly not as it applied to certain tangible assets. A house, despite a number of entities now dedicated to the notion that it will be “traded” like other commodities, is still a place to live and ultimately a great stabilizing aspect of the general economy.
We need to take steps to eliminate speculation in housing by changing the tax treatment of gains for non owner occupants. I particularly like a suggestion I read in the NYTimes today in which a banker proposes that the USGovt immediately “guarantee” all existing first mortgage debt for all owner occupant loans for whoever holds the paper. The effect would be instantaneous and have more immediate effect on the economy (and the stock market) than any Fed interest rate move. Best part is that it doesn’t have an immediate cost association- nobody writes big checks today. Of course, there will be defaults and it will take time and money to remedy them, but there won’t be the negative effect on the economy while we wait it out and I expect the “cost” to be less than any other plan currently being considered.
For every owner occupied default/foreclosure out there, there are probably a hundred families in homes that wouldn’t be there if it wasn’t for some degree of innovation in the mortgage finance biz. We aren’t ever going back to the days of Jimmie Stewart and the Bedford Building and Loan of “It’s a Wonderful Life” and the days of S & L’s taking depositor’s money and loaning out mortgages for 30 years (and holding the paper themselves) isn’t going to happen again and you wouldn’t want it to.
I have heard recommendations that we enforce the Glass Steagall Act and abolish Gramm Leach Bliley Act (to separate banks and securities firms) but we need the dynamics and innovation found in present day mortgage finance. But meanwhile, we clean up the biz... as I said, no speculation on single family residences (SFR’s), make financing a rental home as tough as if it was a $20mm office building. Second, get rid of 100% financing deals (except for CERTAIN first time homebuyers), and get rid of “stated asset, stated income, low doc-no doc” loans. It will take some time to weed through this, but with the conditions mentioned, we will restore normalcy in the current market, provide new and instant liquidity to mortgage markets and perhaps in doing so, we preserve the overall economy.
When Chrysler Corp was in trouble years ago, there was a new phrase (battle cry?) that proponents of the govt bailout coined: “Too Big to Fail.” Chrysler ain’t got nuthin’ on our housing market!!! When the geniuses of Congress “deregulated” the S & L’s and SL’s started holding junk bonds instead of mortgages as capital, we suffered a market meltdown due to the “mark to market” requirement for accurate valuations of the securities (bonds) in order to adequately evaluate the capitalization of the bank. As junk bonds declined in value due to poor initial credit quality and the “easy credit” of the time, and the downturn in the overall economy caused bond issuers to have difficulty in servicing the debt, more banks of all kinds (banks/brokers/SLs) had to mark down their capital holdings (the bonds). The S/L’s were going out of business in a wholesale way. The Congress then voted to bail out depositors (who would otherwise have been left holding the bag) as these SL’s failed because of the integral part of the economy that these entities represented and the bailout cost half a trillion dollars!
There are tremendous similarities between the S/L crisis of the 80’s and today. Consider the troubled homeowners to be the junk bond issuers and the big mortgage banks and other investors to be the S/Ls that hold the debt. As the downturn in the economy makes it more difficult for the homeowners to “service” their mortgage debt, the holders of that debt need to “reevaluate” or “mark to market” the value of that capital they hold which will result in many of them being forced to sell the paper which will further reduce debt prices. We are quickly prompting the very same snowball effect of the 80’s as we force holders of this debt to face the reality of the actual market value.
Unless we find a way to deal with that we will continue to see more large lenders withdraw from the market and there will be an ensuing credit crunch like none before- with huge adverse economic impact.
We need to move now to start the ball rolling to protect an industry and way of life in this country that makes Chrysler and the S/L’s crisis look trivial. Write to your representatives and senators and demand action now!
Dane Faber, Broker
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