Can A Housing Summit Save Us from this Dark Night?
December 29, 2010 11:01 AM
In the 2008 Oscar-winning film, The Dark Knight, a criminal mastermind and agent of chaos known as The Joker, makes an astute observation as to what kinds of crises garner the attention of both the public and government officials. As both a stock market trader and loan officer in the mortgage business, I took a keen interest in and witnessed how government leadership perceived and acted upon the financial industry crisis of 2008. Like the proverbial death of a mayor , the financial crisis drew a massive response with emergency summits, 9 trillion dollars in overnight loans to major banks and Wall Street firms and bipartisan supported government bailouts — while the real estate crisis which has strangled the economy, household by household for the past two years, is treated like the death of one more gang banger, with underfunded and poorly executed homeowner assistance programs and an overall lack of government leadership to deal with the triple threat of massive housing inventory, lack of qualified borrowers and soon to be increasing mortgage interest rates.
We are at a unique tipping point in the economic history of our country when both housing prices and mortgage interest rates are low. These unprecedented, buyer-friendly conditions should be fueling the next boom in home buying. However, persistently high unemployment rates (up to an abysmal 9.8% in November), combined with the stricter loan requirements has translated into falling home prices, flat sales and increasing shadow inventory. This peculiar set of circumstances is providing us with a narrow window of opportunity to act aggressively to address the housing crisis before other market forces increase mortgage interest rates and thus further reduce the number of qualified buyers and the number of both forced and strategic foreclosures.
If corrective actions are not put in place to curb defaults, reduce the shadow inventory and address the appraisal problems now before interest rates go up, then I predict the real estate slump (mild or negative housing appreciation along with higher than expected foreclosures including more strategic defaults) will last for 7 to 10 years instead of the historical cycle of 2-3 years. By 2012-2014, long-term and short-term interest rates will be significantly higher. I predict long terms rates will be around 8% and home equity lines that are currently at 3.25% will go up to 8.25-9.25%. With this scenario, all homeowners with adjustable mortgages and home equity lines will be making much, much higher monthly payments.
For example, a borrower who has a $300,000 primary loan that was fixed for 3 years which is now converting to an adjustable rate of 3.25% and also is carrying a home equity line of $100,000 at 3.25% (a scenario not uncommon to many homeowners I have counseled) would be making a combined payment of $ 1577 per month, now. If interest rates rise by 5% as I predict they will by 2012 to 2014, the loans will readjust to a combined mortgage payment of $2940 per month, nearly double the current payment. Since wages have been stagnant and are not expected to double in the next few years, this scenario could spell economic disaster for many.
To understand the rationale of the strategic defaulter, one only needs to ask what you would do if the equity of your home had eroded to the point that you could not refinance, and your current adjustable rate mortgage payment became 2 to 3 times the cost to rent a comparable property. Would you “do the right thing” and stay in your property making your monthly payments until you had spent your savings and retirement and then were forced to foreclose?
In a previous article, I outlined a rationale for providing a refinancing path to non-delinquent homeowners so they would not have to make this painful decision (link). But I believe, with the right minds focused on the issues, even more could be done to prevent or at least temper the serious economic problems looming on the horizon.
I am advocating a government organized summit to include all key decision makers in the real estate/housing industry. In order to effectively address the housing problem, the summit would need to include:
• President Obama and key members of his Council of Economic Advisors– to provide the gravity and leadership necessary to make the summit a success.
• Ben Bernanke, the Federal Reserve Chairman –as the chief policy maker for short-term interest rates.
• The CEOs of Freddie, Fannie and FHA – because these institutions buy more than 90% of the mortgages in the country.
• The CEOs all the major commercial and community banks in the US – as the major lenders/services of mortgages.
• Leadership from the Mortgage Brokers Association and the National Association of Realtors – to provide an understanding of the problems faced by the average borrower.
• Leadership from HOPE and other community activist programs involved in helping distressed borrowers.
• Representatives from Title and Appraisal Companies to provide an understanding of how new regulations have affected transactions.
Participation from each facet of the industry is necessary in order to fully appreciate the consequences (intended and otherwise) of any proposed action or policy change.
It may be that the key decision makers in Housing do not have the ability or will to make the necessary changes in lending regulations and policies or will not be able to agree as to the best course to take. It may also be the case that there is no solution and we, as a country and as individual homeowners will have to “wait out the crisis” for the 5 -10 years for the market to stabilize. I do believe the American homeowners deserve the focused attention from the leadership from the highest levels of government and our private institutions involved in lending be brought to bear on this crisis. Let’s do this now while we still have an opportunity to make a difference in the economic welfare of many Americans. No one person has the answers to solve these problems, but with all the right minds in one place, perhaps something positive can happen.
Commissioner Gordon, turn on the Bat Signal; We need an emergency housing summit of all the key decision makers to address the real estate crisis in this country!
Logan Mohtashami is a senior loan officer in his family run Mortgage Company, AMC Lending Group, which has been providing mortgage services for California residents since 1988.