How to Keep Americans in Their Homes

Washington should undertake a massive, temporary buyout of residential real estate in order to save its economy from years of turmoil and credit crisis, said an expert who helped bail out Canada from similar turmoil in the 1980s and early 1990s.

Here's is a scheme I wrote about in the Financial Post that would break the vicious cycle that's destroying everything: lousy mortgages, 176,000 foreclosures a month which lowers everyone's property values, frightening write downs which tighten credit for everyone as the banks foreclose.

Workout and insolvency expert Dennis Jewitt pulled off an impressive turnaround in the 1980s involving trust companies, banks and real estate collapses in Canada. He proposes the same fix for the United States and said that the McCain notion of buying mortgages is not the route to go.

"McCain proposes that the government buy the bad mortgages from the financial institutions at their full face amount as opposed to their current market value and transfer that loss into the taxpayers. Next he would negotiate more favorable terms so people can afford their mortgage payments. Under this approach every mortgage would have to be renegotiated and the administration staff will never be able to keep up," Jewitt said to me in an interview with the Financial Post. "The best solution is for the government to buy the real estate not the mortgages."

Here's his scheme:

1. Washington should offer to buy out anybody with a sub-prime mortgage at the local discounted property value.
2. The government should say, "Take it or leave it. You can't afford your house, so we'll buy the house and pay off the mortgage and rent it back to you."
3. The mortgage holder must waive what's called a "deficiency claim" which would allow it to go after people for the losses the mortgage holder would incur. Any bank that refused to do so would not have its property bought.
4. Here's the magic: A sub-prime mortgage at 8% on $300,000 would cost $24,000 a year in mortgage payments. If the government buys it for $240,000, charges the former owner 5% of $240,000 as rent, or $12,000 a year, the government will net a tidy profit because it borrows money at less than 1%.
5. Once prices return, tenants can buy them back if wish at the same discounted price the government paid for them.

The big fix is not a subsidy.
There is also no subsidy involved, people can remain in their homes for half the cost of owning them, then eventually buy them back if they choose to in a couple of years' time.

The government makes money because it can borrow cheaper than banks or anyone else can.

The prices of homes nearby will benefit because foreclosed properties sit empty and drive down all values. Once prices return, the tenant can buy the back if he or she can or wants to do so at the price the government purchased it at.

A Public Housing Workout Corporation should be created to stop the downward spiral and looming bank writedown problems as foreclosures mount. "You have to have enough capital so you can hold these properties and improve them. The last thing the market needs is a fire sale."

In essence, the Jewitt proposal temporarily replaces the commercial banking middlemen, struggling to survive and choking everyone else, with the government. "There were 176,000 foreclosures in July, houses sitting vacant up for sale, and depressing the market value of every house in the area, This idea will keep the properties off the market by renting them to the people that owned them at a rent that's affordable."

For more information about Jewitt's scheme, he can be contacted here. He should be hired to put together a team by the current regime or the next one.

Comments

[ballina]

OK, between Fannie, Freddie and the FDIC (since it assumed IndyMac), the government owns or insures 90% of the mortgages in the country - or so I have read. IndyMac was one of the largest originators of sub-prime loans. So, would it work to just suspend foreclosures? Just stop! Let people pay what they can each month. They stay in their homes and we get through the immediate crisis.

[Jewitt]

I don't believe it is quite that easy. Many of the subprime mortgages are held by structured Investment Vehicles (SIVs) and I presume they would be required to follow procedures in order to qualify for any insurance. Suspending foreclosures just postpones the problem and would encourage people to stop paying.

[Aaror]

Sorry, I disagree.
Despite the crash in housing prices, they are still overvalued (read the Huffpost financial section if you don't believe me). They either need to go down 20%, or remain stagnant for 8-12 years to return to historical norms.
I realize you are trying to "help those poor people," but don't. If the banks were smart they would already be renegotiating the loans, they are choosing to foreclose, and losing the most value. As for the folks who can't afford the mortgage, they can move out and rent something they can afford. I saw this coming and got out of home ownership, why should I pay for people not being as smart as I was (in 2002 no less).

[ORSunshine]

I agree. Allowing people to "rent" their homes and then buy them back at a cheaper price than they agreed to for the mortgage will NOT help the prices drop the way that they need to. Personally, I'm offended at this proposal because I chose NOT to get a subprime mortgage (when I totally could have) because it looked like a losing proposition. I think that the people who felt "entitled" to owning a home that was beyond their means need to learn a big lesson... as do their children. Otherwise our economy will never truly recover.

[Jewitt]

The plan is not intended to "help those poor people" but to stabilize the real estate market. Fire sales do not help to establish the true value of the homes. The plan is also intended to leave the losses where they currently reside, with the lender. Renting the properties back to the current owner is intended to mitigate the cost of the government owning the properties. Providing an option to repurchase helps ensure the tenant will look after the home.
Buying the properties, as opposed to the mortgages, eliminates the requirement to foreclose and the related bankruptcies.

[wdw101]

many people have purchase bank owned property.......nothing is wrong with that.......there are some great purchases....i purchased some properties and let the local fire department use the 3 houses for training......now I have expanded on to one of the properties.....the other 2 properties are for the shop EMPs to park.......2 years ago i would not have been able to expand.......I have hired many more people because 3 families made a dumb mortgage deal..........i say thanks to their stupidity....... one more house that borders my property is in danger of becoming bank owned.......I have made an offer to buy it for future expansion

the beautiful thing was i paid nothing for the house removal.....the fire department burned them down for training........all i had to do was haul away 3 dump truck loads of material that would not burn then grade the property........it was great i could not have planned it better

[dadw5boys]

ROLL BACK THE BANKRUPTIZE LAWS !!!!!!!!!!

[Ping]

"Washington should offer to buy out anybody with a sub-prime mortgage at the local discounted property value."

But what if the mortgages are securitized and there is no clear owner.

[Jewitt]

If the government announced that it would purchase the property for its current market value the investors would instruct the service provider to accept the offer from the government and avoid the cost of foreclosures, bankruptcies etc.
Maybe I am naive but that is certainly what I would do if I was an investor. The only reason an investor wouldn't take this offer is if they believe the deficiency claim has value. I can't imagine any investor would come to that conclusion.

[LeftRight]

That's part of it, but the rest of the economic collapse that we are in will still bite us if we don't deal with it! The fact of the matter is that we ALSO need to fix the job market, by using the govt to fix all our infrastructure problems, and use the govt to start a Manhattan Project of alternative energy.

[jessieo]

Yes. It's time to invest money in jobs that benefit everyone. Safer bridges, better roads, and green energy are things we all need and I don't mind my tax dollars going toward something we need.

[Jewitt]

Agreed but the world is watching how the government is going to solve the real estate crash and the related losses that have been spread around the world. This problem has to be addressed.

[Dynamohum]

I think that instead of referencing a project that starting the nuclear destruction age that McCain's campain does when calling for a new Manhattan Project. That is very telling of his age and cold war mentality. How about what Barack Obama proposed? He compared our 'Space Race to the Moon" promoted by Kennedy in ten years to be on the surface of the moon. It was about that we let nothing get in the way, there was focus. The outcome changed the world and affected the balance of power And look, we Americans did it. He said now we need an "Energy Independence Race" within ten years. No more foreign oil, fossils fuels, etc. Wind, solar, turbine, etc. Develop new nuclear safety technologies before going forward with new nuclear power plants. We have to change our focus completely or this country will perish.

[LeftRight]

The only reason that I called it more a Manhattan Project was just because, unlike the moon shot, which had one goal, the search for the nukes had several points to it.