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Wed

11

Mar

2009

How to Stop Foreclosures - A simple plan for complicated times.
Wednesday, 11 March 2009 12:16
by Stephen P. Pizzo

Sometimes there's a fairly simple answer to what appears an unsolvable problem, and it's right in front us. The foreclosure crisis is Exhibit A.

First let's describe the problem:

Stressed homeowners: Millions of Americans have been – and are being – thrown out of their home because they could not afford their loan payments. Some of those folks bought more expensive homes than they should have, some lost their jobs, some were sold teaser loans that started out with a low monthly payment but have since doubled, or even tripled. As the housing crisis deepened the balance on those loans are now, more often than not, higher than the actual current value of the property itself.

Stressed lenders: With their own capital depleted and real estate valuations continuing to fall, banks are reluctant to make new loans. They are equally reluctant to renegotiate what loans they still hold since any downward valuation of loans on their books would only further deepen the bank's losses. On the other hand, foreclosing and repossessing homes results in losses as well, on average of about $60,000 per property in most states, but in California can be closer to $100,000 loss for the bank per foreclosed property. So, for lenders, they face loses any way they turn.

But there is a way to mitigate these loses and, for stressed homeowners, reduce the fear of eviction from their own home.

Here's how – what I modestly call, The Pizzo Plan – would work:

A homeowner who has been faithful in his/her payments over time, has lost one of the family's two jobs and is now three months in arrears on their $3675/month payment on their three-bedroom suburban home, because they just lost their job.

The lender contacts the borrower with an offer; the lender will renegotiate their relationship with the borrower so that the borrower can stay in the home.

The process begins with the homeowner signing a quitclaim deed temporarily relinquishing their ownership claim to the property to the lender.

In return the lender signs a lease/purchase agreement with the borrower. Under the terms of this lease the purchaser's monthly payment would be adjusted downward to match market rents for similar homes in their market area. (After all, if the bank throws this family out the home they will have to rent one to replace it. So the assumption is that, if they're going to rent another vacant home anyway, why not keep them in their own home where they have a stake in the future.)


Moving the defaulted borrower from loan payments to rent should cut their average monthly payment by nearly half -- and in some cases even more than that.

The homeowner/lessee's new, lower monthly “rent payment” would be divided into two parts; one third of it would be put in a special, interest bearing escrow account at the bank where it will build up over time. When the homeowner/lessee gets back on his/her feet, and is able to resume their mortgage payments, the money built up in this escrow account could be used to reduce the outstanding principle on the original loan, or used to supplement their loan payments going forward.

The other two-thirds of their lessee payments would go to the bank to reduce their loses on the loan.
(At the time of reinstatement the bank and borrower will have an opportunity to renegotiate the terms of the original loan as well, further reducing the likelihood the borrower might default again.)

There would, of course, be the usual kind of landlord/tenant mutual responsibilities, with a few differences due to the unique circumstances. The tenant/owner would be required to maintain the property in good condition, but would also have to pay to fix anything that breaks during the lease period. In fact the only material change in the homeowner/lessee's life would be the lower monthly lease payment.

The lender would, to some extent, have to become a property manager, a role bankers despise. But, at a time when REOs (Real Estate Owned -- repossessed homes.) already litter lender's portfolios, and more are on the way, they're going to end up managing properties anyway. The only question is, will they be occupied or vacant. And will there be a tenant there to take care of the yard, or will the lender have to pay a gardener to do it instead.

No one is going to get everything they would like out of this. The homeowner would not be bailed out, the bank (or Freddie & Frannie) would still have to sustain loses, just less. And, not every defaulting borrower will even be able to afford the market rate rent and will end up being evicted.

On the other hand, it would help millions. And everyone would gain something. If widely adopted it would produce significant benefits, financial, emotional and fiscal. It would make the current down turn less painful, less destructive and shorter in duration, because:
Millions of Americans would be able to stay in their own homes.
Banks would avoid being saddled with tens of thousands of vacant homes.
Banks could avoid having to absorb the large, painful and the inevitable loses associated with REOs
Millions of foreclosed properties would not be dumped to become a glut on an already staggering housing market, properties that would only drive home values further downward causing even more loses for lenders down the road.
Neighborhoods would not become vacant-home ghettos, destroying the sense of community that's so vital to healthy families and healthy local economies.
This plan would not save every homeowner, every lender or eliminate all loses for all involved, including taxpayers. What it would do is reduce loses, reduce stress, reduce hardship, reduce homelessness, reduce suicides and reduce the impact and duration of the current depression.

What it won't do is satisfy the appetite of that yawning black, sucking hole that has become the mortgage backed securities and related derivative markets. They won't like The Pizzo Plan one little bit. But then, do we really give a fig what they think, the very people who caused, aided and abetted and profited by perverting mortgage securitization markets?

(Yes, that was a rhetorical question.)

Chicken Little Turns Community Organizer

The criticism I get most often is that all I talk about is how bad it's going to get but never offer alternatives.

I plead guilty.

I got a call yesterday from a local retired bank executive. She reads this blog and wanted to know if I'd be interested in speaking to local progressive activists about what they can do in the midst of the first full-blow depression in three quarters of century.

I was stumped. I told her it was too late to do anything, that the time to prepare for this was two or three years ago. But now we're all on for the ride, wherever that may take us.

But after I hung up I started thinking. That was wrong. There are things we can do, things we may have to do, and soon. My focus, like most others who spent their working lives focused on national politics, was on what should be done in Washington. I realized that it's also too late for that as well. The trouble, how bad it will be and how long it will last – all that, is already baked into the cake.

So it's not only too late for ordinary Americans to do much, but too late for Washington to do much either, other than do things (like printing money and running up more debt) that may resolve our current problems but only by trading them for bigger problems down the road -- like hyper inflation. When that hits, your house will be worth a lot more but the money you can get for it will be worth less, if not worthless.

That's the bad news. But there is better news. (I can't say it's “good news” because none of us would choose any of what I am about to suggest if we had the choice. But I don't believe we may have that choice.)

So here we go. First, forget "thinking globally." There'll be time for that again later. Right now you better start acting locally -- and with a vengence. By the numbers:

1) First you'll have to define what “local” means to you, based on where you live. In really small towns, local can mean the entire town. After all, you likely know everyone, or most everyone, anyway. In larger towns it could mean a geographical area you consider your "stomping ground." In cities it may mean a city block, a large housing complex or development.

2) Call a meeting of the folks living in the area you define. The goals of this meeting should include:
- compile a phone and email contact list
- compile a list of skill sets within that group, such as mechanics, doctors, nurses, teachers, contractors, farmers, etc.
- compile an inventory of tools that can be shared among the group, like tractors, circular saws, welders, trucks, etc.
- create a garden produce exchange, in which individuals agree to grow extra rows of certain produce in exchange for others sharing their excess produce of a different sort, like tomatoes in exchange for carrots, etc.
Who has fruit trees? Those of us who do know that most of our excess apples, oranges, end up rotting on the ground.

3)Memorialize/formalize your neighborhood group. This should include regular monthly meetings, a weekly newsletter, emailed or snail mailed. Facebook has just launched a "Friends Marketplace" function that allows people to create a craigslist-type section where friends can sell or give away items among their known and trusted friends, or post "wanted" items to that list. Your neighborhood group might consider using this free service. Whatever you do you must maintain the group. Maintaning any kind of affinity group's integrity and cohesiveness is difficult as people tend to lose interest in such communal efforts over time unless they are affected by their membership regularly.

Even before you form your neighborhood group, you need to take care of yourself and your family. So;

1)Buy a little gold bullion. You can get it directly from Credit Suisse on the web. Why? Because we are first experiencing a short period of deflation. That's happening now. But once the trillions in stimulus money hits the fan inflation should take off like a bottle rocket. A couple of ounces of gold bullion not only provides an inflation hedge but, in the event inflation gets so bad people are reluctant to accept paper money, some gold can get you through. But buy the stuff in very small denominations, 1 gram bar-etts to 3 gram bar-etts. Because if you ever really need this stuff it will be impossible to “get change” for a $2000 hunk of gold.

2)This one is going to lose me some readers. If you don't already own a handgun, get one. And don't get a pee shooter, get something with a punch. Just for the record, I'm no gun nut, don't belong to the NRA, don't even like them. But, let me ask you a question: do you have a fire extinguisher at home? Wouldn't you feel pretty stupid if you had a fire but no fire extinguisher, and you house burnt down? Sure you would. Well, that's how I view a gun, as a kind of fire extinguisher. I hope to heaven I never have to use the damn thing, but that's also how I feel about the three fire extinguishers I have scattered around the house. So, let me ask you, wouldn't you feel pretty foolish – or worse -- if one of the growing number of desperate folks out there, kicked your door in one night and all you had to protect yourself and your family was a surprised expression? Home invasion robberies are on the rise. You and your family are “soft targets,” an easy hit, compared to a bank or armored car. Just how “soft” depends on you.

(I was speaking to a local gun store owner just yesteday. He said the demand for both guns and ammunition have surged to such a point that he cannot get all the ammo he orders for his store. "If I order 200 boxes of 9 mm ammo," he said, "my suppliers can only send me 20 boxes. They just can't keep up with demand right now." Who do you think is buying all tose guns and ammo? I don't know, but there are only two possiblities; crooks or would-be crooks, and ordinary folks worried about those crooks or would-be crooks -- or, most likely, both.)

Nevertheless, I understand some folks would rather have a skunk under their bed than a gun. I respect their objections. I just don't share them. While I've never had plug a bad guy, I did have to drop a pit bull that was trying to attack my two young sons many years ago. The kids were sure glad I had the necessary tool at hand for that job. (The pit bull -- not so much.)

One more thing communities could/should consider is setting up a community micro-lending non-profit. Micro-lending, in times like these, is far more important, and effective than traditional banks when it comes to keeping local small businesses in business and funding at home startups. For example, an out of work mother could get a $3000 micro loan to purchase a long-arm quilting machine to make and sell quilts. (Read more about micro lending here.)

So, there. My constructive suggestions.

Fortunately I live in a rural, farming area where I know most of my neighbors already. We routinely lend one another tools and a hand, whenever needed. We already pawn off our excess produce, fruit and eggs off on one another (especially those three-foot zucchini we let go too long before picking, and which even the goats and chickens won't eat it, but you don't have the heart to throw out, so you leave it on a neighbor's doorstep in the dead of night like an unwanted orphan. Not that I've ever done such a thing.)

Maybe things won't get that bad. I hope they won't. After all, I have two sons just starting their working lives and families. I want them to have what I had. So we can home that, maybe the stock market crashing from 14,.000 to 6600 in the near flicker of an eye isn't a sign that “the end is near,” after all. Maybe it's just one of those “corrections,” Wall Streeters declare whenever they lose money for their investor clients. Maybe.

After all, this is America, not some third world nation. When Americans need or want something they get in their car, drive to Target or Wal-Mart, buy it and drag it home – hunting and gathering, American style.

The very thought that times could so bad that all that “stuff” might become scarce, prohibitively expensive – or both – is, well, like crazy talk.

Nevertheless, I'm hedging my bets. If I'm wrong the worse that happen is I get stuck with two boxes of ever-so-slow rotting MRE's and some gold I'll have to have melted down into jewelry for my wife so she stops asking "did you make money on that stuff or what?"

Oh, if I'm wrong, and everything gets back to normal, maybe I won't have to return all those tools I “borrowed” from my trusting neighbors during the dark times. Because, when it comes to tools, I have a real Bernie Madoff streak in me.
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