Dear President Obama,
I recently received an email from my friend, Carol Johnson at the Recruiting Pipeline. She sent me the letter as part of a mailing to the leadership in the real estate industry asking us to consider how to solve the problems of the current housing crisis.
How To Solve The Current Housing Crisis
I spent several weeks chewing on the thought. What would I say to you if you were to ask me how to solve this current crisis? I had mixed feelings on it. What it came down to for me is this: it’s not about saving the banks from bad investments, and it’s not about digging borrowers out of holes that they got themselves into. As a benevolent parent, the governments’ job is to stave off the catastrophic results the housing downturn is having on the economy as a whole and bring it down to just enough pain that we don’t do something this stupid again. At the same time, the government has to remember that not everyone is in the same situation and you have to be responsible to those who were not caught up in this buying frenzy as well. So, with that in mind, here is my thought.
Buy The Land Under The Houses
In most markets, we have fee simple land ownership that conveys with the house. On every street card, there is a value placed on the land and one on the building. If we’re going to bail people out and make things more affordable, then let’s do it by reducing the principle owed on the property without asking the bank to take a hard hit and without the owners losing their houses. The deal works like this:
- The banks would have to forgive all late fees and rewrite the loans at no cost (after all, they are getting the benefit of not having to foreclose on a bad loan). They also have to agree to continue to collect the taxes on the land from the homeowner and pay them with the taxes on the home.
- The government issues bonds to investors to raise the capital and then buys the land at current appraised market value.
- The homeowner gets a deeded option to repurchase the land at a later date at the original price paid by the government or current market value – whichever is greater.
- The money paid by the government would go to the bank to pay down the principal balance of the loan, allowing the bank to convert an impaired asset into a performing asset which boosts the bank’s asset rate and lessens reserve requirements, strengthening its balance sheet. This makes the bank more stable, reduces the stress on government resources, and ultimately increases the availability of funds for consumer loans.
- The homeowners would then get a new loan issued by the bank for the lower principal amount and have to pay a reasonable monthly lease (1% per year) on the land. The homeowner would also still be responsible for paying the taxes on both the land and the home.
- The bonds issued by the government for the purchase of the land would be backed by the land with dividends provided by the lease payments.
Here’s how it would work in an example case:
Harry Homeowner has a house that he is behind on his payments on. He is in danger of foreclosure. The bank has charged him hundreds of dollars in late fees and there is no way he’s going to get on top of things again. What he needs is a fresh start.
Harry’s loan is for $300,000, but the property is only valued at $225,000 in the current market and he can’t sell it. The government offers to buy the land under Harry’s house. The land is valued at $85,000. Harry sells the land to the government and pays down his loan to the bank, leaving a balance of $215,000. The bank agrees to forgive the late fees and rewrite the note. It issues a new loan to Harry on the house only in the amount of $215,000 at a lower interest rate taking Harry’s principle and interest payment from his previous payment of $1871.61 at 6.375% down to a new payment amount of $1073.46 at 4.375%. Harry pays an additional $70.84 per month (1% per year of the purchase price of the land) in addition to his mortgage to cover the lease costs on the land. This makes Harry’s total monthly payment (not including taxes and insurance) $1143.51, saving him $728.81 per month. This savings allows Harry to keep his home and the bank to avoid foreclosure.
Ten years pass and Harry wants to sell his home. He puts the house on the market and finds a buyer who agrees to pay $350,000. Harry then exercises his option to repurchase the land from the government. Current appraised value for the land is $110,000. Harry’s attorney does a simultaneous closing on the property, with Harry purchasing the land back from the government for $110,000 and conveying the house and the land to the new owner for $350,000. The bank gets its loan of $215,000 paid off, the government gets the $110,000 and Harry Homeowner gets the balance of $25,000 (less closing costs).
The Results
Win: The bank didn’t foreclose and got the full amount of its loan repaid.
Win: Harry didn’t lose his house to foreclosure, saved his credit and came out the other end with a little money in his pocket.
Win: As an investment for the taxpayers and bond holders, the $85,000 has matured into $110,000, for a $25,000 increase. In addition, the government has also received interest in the form of lease payments on the land in the amount of 1% or $850 per year. Over ten years, this totals an additional return of $8500 for a total profit of $33,500, an ROI of 3.38% per year which is a better return than the 10 year Treasury Bond rate which was 2.77 as of close of business Friday last week. (Obviously, this is a little more complicated than this, but you get the idea.)
What Happens If Harry Homeowner Still Forecloses?
In many areas, affordable housing is a big issue. It's all local towns and municipalities can do to get developers to include affordable units in their developments. Those towns could change their local regulations to state that the affordable housing unit doesn't have to be in the development itself - it can be provided in the same town but in a different location within that town. This would make developers tremendously motivated to buy any of the properties served under this plan that go to foreclosure since they would cost the homeowner up to a third less than the local area prices. Even if the builder had to take a loss on the purchase and resale of the home to get the monthly payments into the "affordable" level, it will likely be less than the gain of an extra new unit selling for full price. It's a good trade.
This Plan Has Several Benefits
- It will reduce the principle of the loans for the current homeowners allowing them a payment level they can afford to sustain.
- Banks only have to eat the cost of refinancing the loans at a lower interest rate and forgiving the late fees, not the cost of foreclosing and reselling.
- The payments from the land purchases to the banks would allow them to convert impaired assets into performing assets. This boosts the banks' asset rates and lessens their reserve requirements, strengthening their balance sheets. This makes the banks more stable, reduces the stress on government resources, and ultimately increases the availability of funds for consumer loans. Freeing up additional funds for new loans and opening up credit lines for new spending would be a boon for the economy overall.
- Property values won’t suffer as a result of the plan since any subsequent purchase of the property would be made including the land when the current seller exercises his/her option to purchase the land back prior to conveying it with the property.
- It’s a purchase backed by real estate, which means it’s not going to contribute to the deflation of the dollar.
- It provides a stable investment for older investors who need some way to hedge their bets in this uncertain economy.
- For the purchases that don't get paid for by bonds, the tax payers will see a return on their investment as the economy recovers and property values improve. At the very least, we are guaranteed to get our money back with the land lease payments as interest. At the best, the appreciation and the land lease costs will provide a tidy profit for the use of taxpayer monies.
- It’s not a free ride for anyone. The banks lose out on the refinance and late fees as well as taking only a slightly more than break-even interest rate. The homeowners lose out on the appreciation of their land and have to pay conveyance taxes and closing costs on the land multiple times. In short – those who made bad decisions get a chance to pay for those bad decisions without being destroyed by them.
So, that’s the crux of the idea, Mr. President. It seems to me that it would work. I’d welcome the opportunity to discuss it with you. I also have some ideas on how to make it easier to be self-employed if you’re interested.
Sincerely,
Kelle Sparta
Author of The Consultative Real Estate Agent
National Speaker, Trainer and Coach for the Real Estate Industry
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If there is one thing I know, it's that I don't know everything. I am a generalist, a Renaissance woman. I know a little bit about a lot of things and I use that knowledge to seek out patterns across a large swath of territory. This allows me to think strategically rather than tactically which is a great boon to my business and to my coaching clients. But you have two choices in life - you can go wide or you can go deep. There is not enough time for both.