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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: patron_anejo_por_favor who wrote (135185)7/20/2008 11:37:23 AM
From: RockyBalboaRead Replies (1) of 306849
 
Recently it occurred that we discussed possibilities of a "way out" of the mess at the local university. All the proposals which have been made have been rendered pretty useless by participants (except the market approach where the lender has some stake in return for partial debt forgiveness).

In short, the group agreed that a kind of general workout is required, but with a staged approach. We believe that something similar will happen. Or, the market will make it happen but possibly with unwanted distributive effects.

To reduce or prevent moral hazards, basically all outstanding good mortgages should be crammed down by several percentage points, e.g. 8%. This provides an incentive for debtors of good loans to stay good (and prevents further defaults so, the "chain of defaults" can be finally broken).

Next, owned occupied homes which are in certain specified noncurrent scenarios shall be reduced by 20% with some extra percent for each child living in the home.

Lastly, we talked about mortgages which are in distress beyond repair (e.g. 40% underwater at current balances or having true repayment rates which will exceed the household income and are subject to recast). In those cases, the occupier should give up all titles and offered to use the house on a rent.
Title should go to a government sponsored new GSE which issues debt in lieu of the cancelled mortgage to the former lender and otherwise collects the rent.

Ultimately, non owner occupied homes having no equity and/or owned for less than 3 years and are in distress, shall be seized by the same GSE and reappraised. The lender shall receive a note on the reappraised lower value. If occupied by a renter he shall be offered a rental contract based on market prices.

Fees shall be outlawed and late fees etc for the last 6 months reversed retroactively.

We wondered whether such a solution could be sold politically. It can, under national and social considerations. It could keep neighbourhoods intact by not forcing out people and destroying microcosms. By doing that the market value of all homes in a vicinity can be preserved and is not subject to further deterioration.

It means that good mortgages are somewhat compensated. We found that better than an "all purpose - serves noone" general stimulus payment.

To finance a portion of it, fed fund rates shall be raised quickly to a market level but not less than 4%. 5% is mostly viewed as a suitable rate.

Of course what is the other side saying: Our assets are being crammed down but theres a twist. It would stabilise the US dollar and by this way also the bonds could stabilise and then apprechiate in non USD terms. Lenders (and buyers of the debt) must be told that there is no alternative; it will merely stop the bleeding.
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