There is virtually unanimous consent that housing’s recovery is the linchpin to the economic recovery. Unfortunately, the run-up of housing prices over the past five years was so large, that the shake-off of this excess will take more time than most want to admit. The National Association of Home Builders predicts house prices will fall another 5% nationally to 25% by the end of June, 2009 before bottoming.  I think this is probably a little optimistic. Unless we can curtail the potential for millions more foreclosures over the next two years, house prices will most likely drop further.

We must take action now to re-work mortgages facing foreclosures. With billions of dollars in Adjustable Rate Mortgages (ARM’s) due for interest rate resets next year, the crisis is like the snowball that gets larger with every turn.

In these times, borrowers aren’t really worried about the fluxuation of their home values.  Most realize that the value of their homes have decreased.  Borrowers care about their monthly payment.  That was the main driver when they got into the home and it must be the main issue addressed when we look at dealing with the distressed borrower.

Sheila Bair, FDIC chairwoman, unveiled a plan last week that is the first major governmental step in addressing this issue. With the potential to help 1.5 million borrowers in its initial phase, the plan is relatively cost effective at an estimated $25 billion (which would be taken from the TARP.)  The plan essentially halts the increase in interest rates in an adjustable rate mortgage and pegs it at 3% for as long as five years.  This keeps monthly payments down and helps borrowers afford their homes. In order to help mortgage servicers do this, the FDIC would backstop 50% of the losses if a borrower who received help goes into foreclosure afterwards. The FDIC would also pay $1,000 for each loan restructuring.

Why Paulson and the Bush Administration are only lukewarm to this plan does not make sense.  They pretend that the $150 billion they gave to shore-up AIG is some type of good investment that will be recovered under TARP legislation, as opposed to Bair’s $25 billion, which is subject to loss.  I would put my money on the homeowner.

Other plans have called for a 90 day moratorium on foreclosures. As bankruptcy attorney Larry Anderson, partner of Pels & Anderson in Bethesda, Maryland, points out, “This is a bad idea as it merely delays the inevitable without addressing the root of the problem.”  Larry points to the fact that in Maryland, where a 180 day period was enacted, he has seen evidence that it has only caused homeowners to “become hopelessly behind” when they come to see him for a chapter 13 bankruptcy. “Instead of being 3-6 months behind, they are now 10-14 months behind,” says Anderson.

Anderson favors allowing bankruptcy judges to modify loan terms. But even in this case, the courts’ main focus will be the borrowers’ ability to make the monthly payment.  Without that, it’s an exercise in futility.
Yesterday, Fannie Mae and Freddie Mac announced a six week freeze on forclosures, so that servicers can catch-up with the implantation of the streamlines loan modification program for borrowers. The main goal of the program will be to cut monthly mortgage payments.

Looking ahead, we also need to incentivize new home buyers. I urge Congress and the new administration to pass tax incentives for home buyers. This will directly stimulate home buying and will help dry-up the glut of existing homes on the market.

Leadership and immediate action is needed now. The longer we wait, the more it will damage our existing economy and America’s wealth. If we can turn around America’s housing crisis, we will turn the economy for the better.

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