February 2009
Hirsch Housing and Economic Recovery Plan
The Problem: Many people are unable to pay their mortgages because their interest rate has adjusted and their payments have gone up. They can’t sell the house because the housing prices have dropped. The housing prices have dropped because of over-speculation, overbuilding, and defaults on mortgages. More defaults will further expand the problem. More and more of the banks and investors who hold these mortgages (toxic assets) are becoming insolvent. This is causing an extreme tightening of credit, thus aggravating the entire process. It’s a downward spiral.
It doesn’t really matter who is at fault. We are where we are. We have to find an effective solution immediately.
Proposed solutions have included the government buying up these “toxic” assets to free up the credit market. It’s too late for that to be effective because the confidence in the system is gone. Now solutions have been proposed to “help out” the people who can’t make their payments. This help comes at the expense of the people who are struggling to make their payments and be responsible citizens. There is no sense to helping the people who are in the worst predicament when they created the predicament through their own actions while offering no help to those who work so hard to pay their bills and meet their obligations.
The difficult part of all of this is if many foreclosures are allowed to happen, it will still hurt the responsible citizens through indirect consequences. Foreclosures will further reduce property values creating more cases of people owing more on their mortgages than their house is worth. They will be underwater, as they say in the mortgage industry. All of the housing problems are absolutely killing the economy. As lay-offs occur, more foreclosures are right around the corner. This must be stopped.
I propose that homeowners who are in trouble could opt to turn their houses over to the government. Here is how it would work:
1. The house becomes government property.
2. The U.S. government would assume the remaining mortgage, except the interest rate would be recalibrated to a much lower figure, possibly 1%. This will mean that the lenders who “lured” unqualified borrowers into mortgages they should never have had, with no down payments and teaser interest rates will bear a portion of the cost, but they will still be in a positive position. These mortgages would become “non-toxic” assets. They would have value not because they earned a high interest rate, but because they would be guaranteed by the government. The banks would remain solvent, although less profitable.
3. The former homeowner would be allowed to stay in the house, but now they would become a renter, paying the new owner, the government, monthly rent at a rate balanced to their income and the value of the house. This will create a cost to the government (the difference between the mortgage payment and the rent amount), but this cost is necessary to keep the house occupied and the former homeowner out of bankruptcy.
4. The former owner, now renter, would enter into a two year lease on small houses, three year on larger houses, to ensure occupancy so as to protect the value of the neighborhood.
5. The former owner, now tenant, would be obligated to maintain the property. We can not allow the troubled properties to erode the value of the neighboring houses where responsible citizens are paying their bills as they should.
6. The difference between the former owner’s mortgage balance and the true property value would be calculated. The former owner would enter into a long term loan with the government for that amount. Rather than discounting the balance on this debt, the former owner would be given a “no payment” grace period or a stepped payment schedule to assist them in repaying the balance to the new owner, the government (the taxpayer). The interest rate on this note would be similar to student loan rates. The entire concept of these loans would be similar to student loans.
7. Programs would be created to allow the former owner optional ways to repay the debt by working. Programs could include infrastructure rebuilding, works at local schools and other work that the government would otherwise pay people to do.
8. Incentives in the form of debt forgiveness would be offered for speedier repayment. This cost of reducing the balance would be worth it to the taxpayer because it would benefit the entire economy. A more robust economy is good for all citizens.
9. The government would have the option of reselling the houses, either individually or in blocks, to investors to manage.
10. Or the government could hold the properties until they have recovered in value, which will eventually happen, at which time the government would gradually reintroduce the houses into the real estate market. Care must be taken to not flood the market and drive prices back down again.
11. The former homeowner would incur limited damage to their credit scores beyond what damage may have already occurred. This would allow them to still participate in the economy, but they would be identified as riskier borrowers and pay higher rates. They would be disqualified from obtaining a mortgage for as long as it took them to repay the note to the government.
12. Property taxes would still have to be paid on the property, by the government or the party the government might sell the house to, to avert the drain on revenues for schools and local governments. If there are community association fees attached to the properties, those would have to be paid, as well, so that the community organizations do not suffer financial hardship.
13. The banks and investors would have their portfolios stabilized. Toxic assets become low interest yielding, but solid, assets.
14. The housing price decline would be stopped. The number of available housing units on the market would be drastically reduced because these would now become rental properties. The supply would be reduced and would begin to match the demand again. This would be analogous to companies buying back their own stock to increase the stock’s value.
15. It would cost taxpayers much less money than the bailouts and stimulus packages. These measures are only staving off further declines.
16. Instead of the government simply handing out trillions of dollars for nothing, the government would gain real property. Although these properties are at distressed values now, they won’t always be. Time will cure the problem. The government is the only entity in a position to hold large amounts of property for extended periods of time.
The benefits of this plan are:
1. It is compassionate. It helps people in need.
2. Every $12 billion spent by the government annually could save one million houses. This is much less expensive than any other plan and the expense is spread over several years, not all at once.
3. It keeps houses with troubled mortgages occupied and stops the drain on property values.
4. The government (Taxpayers) gets real property for the money expended. This property can later be sold to recover the investment.
5. This plan solidifies toxic assets and stabilizes the credit market.
Please give my proposal serious consideration. It will work. If you agree, please contact your Senator, Representative, Governor and especially the President. We need a plan that actually works.
Thank you,
William J. Hirsch Jr.
hirschnc@nc.rr.com
www.designingyourperfecthouse.com
www.williamhirsch.com
William J. Hirsch Jr. is a registered architect who specializes in residential design. He is the author of the bestselling book, Designing Your Perfect House and his new book, The 10 Keys to controlling Homebuilding Costs.
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