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Are We Even Focusing On the Right Things?

Two seemingly unrelated stories have one thing in common for me. We are expending energy on relatively tangential issues when our economy, and the real estate markets, need more drastic action.

1) Over 100,000 suspicious claims for the $8,000 first-time homebuyer credit have been filed with the IRS. In order to be eligible for this tax credit, a homebuyer could not have owned a principal residence for three years before the purchase. Assuming you had a mortgage, you would have filed for a mortgage interest deduction. Furthermore, mortgage lenders report interest payments to the IRS (Hat tip: Bruce Hahn). The low-level attempts at fraud will therefore be caught. What concerns me is that so much time is expended on this gimmicky $8,000 tax credit. Since the FHA is providing aggressive loan to value ratios, the tax credit, combined with easy FHA money, is a return to the days of little to zero down.

As of August 31, 2009, 5.73% of the 2.76 million FHA-endorsed loans had at least one default.

After 12 months, FHA and VA loans are suffering the highest re-default rate, at 59.1%.

Those who forget the past are condemned to go bankrupt, unless, of course, you’re a TBTF bank.

Even though it is a gimmick, I am in favor of extending the deadline, and allowing all homebuyers to take advantage of the program. My support comes with two caveats: (1) verifiable W-2 income for 2 years; (2) 20% down from seasoned funds belonging to the buyer. This way, we can verify that buyers will be less likely to throw the keys back to the bank, and could afford to make the payments. These, of course, are no guarantees, but they are vastly better than the system (or lack thereof) in place.

In order to revive the moribund residential housing market, we need more ammo in our gun than this tax credit. We need to modify residential loans across the board. Uncle Sam (read: we) is giving banks money to borrow and burn at the discount window at virtually zero percent. The banks are hoarding that money, and refraining from lending it in order to prepare for the eventual rainy day when they mark their toxic assets to market. We should let Uncle Sam refinance home loans at one to three percent on a trial period for those who can afford the payments. Uncle Sam makes a profit, foreclosures drop, and real estate– residential and commercial — recovers in value.

While we’re at it, we should also expand the government’s HAMP loan modification program beyond primary residences. The HAMP program does not cover jumbo loans, or mortgages on second homes or investment properties. According to one estimate, those three categories comprise 60 percent of all the residential mortgages.

Why should we expand HAMP and refinance across the board? Those who cry socialism should note that if such radical surgery is not performed, the alternative is far worse: folks who are current on their mortgages and bills will lose even more equity on their homes, causing a further wave of strategic defaults. According to one study, every home foreclosure drives down neighboring home prices within 1/8 mile by 0.75%. Properties within zero to 300 feet on average experience a 1.3 percent decline in value, while properties within a 300-660 foot ring (660 feet = one eighth of a mile) have a 0.6 percent decline. If these houses get foreclosed en masse, the housing and multifamily markets will further implode.

2) Responding to the growing furor over the paychecks of executives at companies that received billions of dollars in federal bailouts, the Obama administration will order banks that received the most aid to deeply slash the compensation to their highest paid executives. I’ve long believed that if Uncle Sam rescued banks from oblivion, especially after they nearly destroyed the global financial system, he can ask for payback. Literally. Nevertheless, my fear is that salary cuts is an easy concept to grasp. The Obama administration can throw this sop to the masses, and keep them quiet and/or distracted on more pressing matters. Specifically, the economy, and the real estate market, are in the toilet in no small part because banks are not lending. Buyers still have difficulty lining up financing, and commercial real estate transactions are still at a virtual standstill.

If banks start purging toxic assets from their books, deal flow and credit will return to the marketplace. Banks, however, have no incentive to do so. If Washington is serious about getting this economy and the real estate market moving again, it will not just focus on salaries in the C-suite. Instead, it will threaten revocation of banks’ charters (and their attendant ability to borrow from Uncle Sam at near zero) unless and until they lend a certain percentage of their assets. Right now, banks have no requirement to lend even a dime if they wish to stay in business!

Let’s stop focusing on the insignificant things, and worry about the things that really will make a difference in fixing the economy and the real estate market.

Related posts:

1. Bonus Question: Fannie Mae Foreclosed 62,615 Single-Family Residences in 2009. Guess How Many Are Leased? A) 42% B) 22% C) 2% D) .2% E)...
2. No News to Multifamily Investor Readers: Banks Are Not Lending. Commercial Real Estate Market at Standstill. Readers here read on 10/19/09 that banks are under...
3. How Many U.S. Housing Units Received Foreclosure Notices in 2009? A foreclosure filing includes default notices, scheduled foreclosure auctions...
4. Will Uncle Sam’s Guarantee Revitalize New York City’s Apartment Building Market? Freddie Mac, the mortgage-finance company with U.S. government support,...
5. …But How Do We Know That The Banks Aren’t Lending? Lack of credit for buyers puts a major damper...

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