Response to United States Moves to Shore Up Troubled Housing Sector

By Stan Brody

Comment on story http://newsblaze.com/story/20080731065119tsop.nb/topstory.html OK... now divide 400,000 into
the $300 billion....that would be $750,000 per home... however if the new limit is $625,000 are we now going to
fund 400,000 loans at funding loans at 120% LTV!!! I don't think soooo.... that would mean that we now have a shit load
of money going into fat... and "foreclosure counseling" managed by a GSA that itself is run by a conglomerate made up of
United, Allied, Mayflower and North American Van Lines... the counseling will teach people how to pack their belongings
in time for the sheriff's sale...

My NY Times op-ed piece....

As the politicians and media praise the just enacted legislation designed to prop up Fannie Mae and Freddie Mac one must wonder, what was congress thinking... almost a year to arrive at legislation that is doomed to fail in the purpose that it was intended...do they have any understanding of what is over the horizon? Obviously, political expediency takes precedence over sound business decisions. By its design, this legislation can not and will not address the foreclosure issue. Not one of the funding proposals before congress does... not the loan limit increases... not the FNMA/FHLMC funding... not Rep. Frank's proposal... and certainly not Sen. Dodd's just adopted $200 billion "Foreclosure Counseling" addresses the immediate need of true mortgage relief.

The crisis that we now face has gone far beyond the sub-prime borrower... the "A" paper, 800 FICO score borrower who has done everything correctly... the self employed borrower... the salaried employee with the long job history... savings and the 401K... the person with the gold star from Suze Orman is finding it difficult, if not almost impossible to refinance today... how does this person refinance a $400,000 loan, when the appraisal says that the home has a current value of half that figure? Simple, you don't. In many areas lenders are reducing their own appraised value by an additional 5-10% just to cover the anticipated further declines in real estate values... this borrowers' sole mistake is to reside in a city where he is surrounded by foreclosures and short sales and the bank's own REO fire sale... Thus, all of the sound bytes and photo-ops are, like the legislation, of little use to millions of Americans... in fact, far more will be left out in the cold than find assistance.

The new higher loan limits were long over due, and for new sales will be of benefit... but of the new sales of what?... The foreclosed upon home of another person... and most often at 97-100% loan to value... and each time one of these homes is taken back by the lender and the resold at fire sale prices, the local communities and counties take a huge loss in their tax base.

What is looming over the horizon?... The probable bankruptcy of many counties throughout the country. There have been in excess of 63,000 foreclosed upon homes in California during the first half of 2008 alone! In addition, there are over 200,000 in some stage of default... plus thousands of homes, that are not in default, but on the market to be sold as "short sales." Based on my first hand knowledge, the lenders can expect to take additional losses of some $200,000 per home at resale... this translates to over $145,000,000 in lost real state taxes to the counties for the first half of the year... add to this the more than $100 plus million lost in the second half of 2007... the losses that can be expected for the balance of 2008; and depending on which "expert" one relies upon, for the following 1-2 years California will face over a billion dollars in immediate lost tax revenue. However, this is not the half of the story. These losses can never be recovered, and due to the method by which the taxes are calculated, over the years, they will actually compound themselves...

This is only the tip of the iceberg... the counties will have no choice but to lay off people and cut back services... schools, fire and police protection, ambulance service, county hospitals, social services... nothing can or will be untouchable. Businesses that rely on government contracts will be compelled to follow suit... Ultimately these losses will filter down to every segment of our economy... and will amount to a staggering amount of money... perhaps measured in the trillions of dollars... and where is that bail out money going to come from?

In recent house testimony FDIC Chairman, Sheila Bair called on the mortgage lenders to voluntary modify their notes. Ms. Bair is "dead on" in this recommendation. That simple, inexpensive act would by itself calm the market. We would be far better served by taking the $200 billion that Senator Dodd wishes to allocate for "foreclosure counseling" and instead fund that money through the FHA as loan buy downs in the form of Mortgage Assistance Grants. Dovetailing with the Chairman's call for modification, the proposal that follows will stem the foreclosures, convert several million non-performing loans into performing assets at the banks, allowing them to again lend into the community thus spurring on the economy, halt the further slide in the real estate tax base at the state and county level, and eventually provide several million units of affordable housing. Not to mention add strength to the dollar which will stem the increase in inflation, enabling the market to keep rates low.

Is this a bail out, absolutely yes...will there still be foreclosures... of course, no plan can fully eliminate them... but it will be reduced them to a trickle as opposed to the flood we currently face... the cost would far less that the assistance that was afforded to Wall Street... It will make the $25 Billion made available to Fannie Mae and Freddie unnecessary ... For a change we would actually receive a return for our investment... not to mention that it will remove the "fear factor" that has a solid grip on our society today. The question here is not the moral one of aiding perhaps 2 million Americans in keeping their dreams intact... but instead a make sense business decision... do we spend $200 billion to stop this free fall and bloodbath... shore up the economy and thereby the dollar or wait to be forced into facing the consequences of this well intended but politically motivated and misguided legislation...

The plan...

Phase one:

Every lender already has Rider Forms (modification) within its portfolio of loan documents. Therefore, through the implementation of the existing Riders, this plan calls for:

1. LOANS THAT HAVE NOT REST: Modify all 2-3 year ARM products in this category to 3 years from the date of the rider for the 1st adjustment.

2. LOANS THAT HAVE RESET, BUT NOT YET DELINQUENT: Reset these notes back to the entry rate, and provide for a 3 year date from the date of the rider for the 1st adjustment.

3. ON NEGATIVE AMORTIZATION LOANS: Using a Rider to the note, modify the instruments to allow for a 120% accrual... an increase from the current 110-115% maximum accrual that triggers the unlimited reset. This will provide a 3 year cushion.

4. LOANS ALREADY IN FORECLOSURE: a) Enter into a FORBEARANCE AGREEMENT with the homeowner. b) Stop the foreclosure at the present date. c) Calculate the amount in default*. d) Add the amount in default to the principle balance. e) Reset the interest rate back to the entry rate. f) Recalculate the new payment based on the new principle balance, and g) Modify the new date for the first adjustment to be 3 years from the date of the forbearance agreement.

* On a $400,000 loan that has adjusted from 6.375% interest only to 8.375% fully amortized for 28 years, the amount in default might be less than $10,000... And a new interest only payment at 6.375% on $410,000 would be $53 greater than before the first adjustment. Keep in mind that the vast majority of these owners went into default only after the first loan payment increase.

Insofar as the Riders already are prepared the need for attorneys is removed, the actual direct cost will be reasonably inexpensive. Preparation, Notary and Recording are all that is required.

5. Remove any prepayment rider attached to the original note and/or deed of trust.

Phase two:

Once the foreclosures have been curtailed we would revisit these loans and; where required and/or feasible implement Phase Two of my proposal.

1. Refinance the now stabilized loans with the lender, providing the homeowner with the maximum loan, at the lowest market "screen" rate, that he/she would qualify for under FNMA/FHLMC or FHA guidelines. The lender would pay for all related non-recurring fees.

2. The remainder due on the original loan would come in the form of a tax exempt FHA Mortgage Assistance Grant (MAG. Thus, the total of the new financing would equal the old loan balance. No loss to the banks, and no tax liability for the borrower. There would be no change to the real estate tax rate; and the annual amount would remain the same.

3. The FHA MAG will carry a profit restriction that limits the maximum of the annual FHA actuarial rate of appreciation, but limited to a maximum of 20%, net of the cost of sales and any home improvement cost made after the date of the grant.

4. The FHA MAG would also have the provision that requires the real estate taxes to remain as before.

The net effect and bonus of the profit limitation contained in the grant restrictions will be the creation of a huge national supply of affordable housing from the existing inventory of homes, and at no additional cost.

judythpiazza@newsblaze.com

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