Saddest Quote du Jour
Only those who are compelled by an old-fashioned sense of obligation might continue making payments.
This is the opinion of the Milken Institute’s director of regional economics Ross DeVol and president and chief executive Michael Klowden, which appeared this past Friday in the Financial Times.
They’ve mapped out a plan that the HUD Secretary Shaun Donovan, FDIC’s Sheila Bair, Treasury Secretary Tim Geithner, and the Fed’s Ben Bernanke should consider in light of the feeblest signs that home buying demand does exist if just a few of the foreclosure headwinds can be muted.
DeVol and Klowden note that the big flaw in Obama’s program to stem foreclosures is not in its mission nor even its structure, but in its math. A 105% LTV ceiling just doesn’t cover enough troubled homeowners, nor does the current program forcefully enough incentivize wavering borrowers to weather the storm and keep repaying.
To fix this conundrum, the Obama administration should add the homeowner principal forgiveness vesting plan to its program. Here’s how it works: After a valuation of the property and proper income and credit verification, two separate loans are made. The first loan, from Fannie Mae, would be for the current value. A second, interest-only loan, from the Treasury Department, would make up the difference between the current home value and the original mortgage.
We wonder how widely shared the two authors’ view is on the following assumptions:
- 6 out of 10 purchases since 2004 are underwater
- Every 100,000 foreclosures prevented translates into .5% on home price stabilization
The big time conclusion:
So, if 1.5m foreclosures were to be avoided, home prices would be 7.5 per cent higher than without the plan.
That’s a lot of wealth destruction avoided, a lot of consumption capacity preserved, a lot of jobs saved.
Still, it’s sad that the sense of obligation to pay back what one borrows is “old-fashioned.” Passe.
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