Over the past few weeks there have been various discussions on how to resolve the mortgage and housing problem. Since this is an subject that crosses my desk with some regularity I have understandably given it a great deal of thought. In looking at a few of the proposed solutions I find that some could be quite helpful while others might not do much good, at least not in my area.
One proposal that sounds good but might not do as much good as we would hope is the proposal from the Obama adminstration on helping out people who are in danger of foreclosure. The plan is supposed to help them to refinance the property at lower interest rates and take into account the fact that many now owe more than the property is worth.
The problem is that the plan will only apply to homes where the debt is equal to or less than 105% of the total value of the property. Looking at my own region, most people in trouble owe far more than that, indeed in some cases they may owe double the value of the house and thus would be unable to qualify for the plan.
I realize that people do not want to help out people who bought beyond their means but given the fact that housing prices vary greatly from place to place it is perhaps in this area that a change could be made to how we determine who qualifies for these plans.
For example, I think we would all agree that if a family of four with an average income purchases a McMansion with 5,000 square feet of space and a pool and spa on an acre of land that they would have overbought.
On the other hand if the same family purchased a house with 1,400 square feet and a small yard on a 1/4 acre of land in an average middle class neighborhood that they would be purchasing the kind of house that was appropriate for them.
The problem is that depending on where these houses are located the prices could vary significantly. For example if the McMansion were located in the Midwest it could very well cost $ 200,000 while the average house could cost $ 300,000 if it were located in the San Francisco Bay Area.
Under this scenario the McMansion owner could very well qualify for help under the proposed relief plan while the the average homeowner in Orange County could be out of luck. This is why I think the current Obama plan has some serious flaws.
It could very well help those that do not need help and ignore those who do. It would obviously require a carefully crafted solution to take account of these issues but if we are really going to try and help those who need it and not those who overbought then we need to take this into account.
It is for this reason that I am a little more optimistic about the proposed changes to the Chapter 13 Bankruptcy laws. Obviously the current proposal will go through a great deal of reworking as it passes through both the Senate and the inevitable conference committee but it is a good start.
I know that there are some who question the reduction of the mortgages and the fact that it would make banks reluctant to loan money in the future. But at this point we are in many cases looking at a choice between the loan being reworked or the homeowner being forced to abandon the house. This simply gives the bank another house that it cannot afford to maintain and that it cannot sell in a down market.
Now I would like to see some changes to the proposal. For example I would like to see it incorporate some of the issues I discussed above relating to the fact that some people have far too big houses that cost less versus smaller houses that cost more. I would hope that we could have some sort of standard in terms of size of house versus number of occupants. Of course there would need to be considerable flexibility in this standard, which is why I think it works to have a judge involved to make those choices.
I also would like to see some options for the bank to come back and rework the loan should the house go back up in value, at least to the point of the original loan. This would give banks some confidence that should the market improve then they would be able to recover some of the lost value.
Obviously this is just a rough sketch of what might be done and since I am not sitting in Congress or the White House I am hardly in a position to think I have all the solutions. But I do think these ideas are worth considering