Questions But Not Answers

Roger Schlesinger
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Posted: Jan 13, 2009 10:42 AM
Questions But Not Answers

We all know that thousands of people are losing their houses, and while many already have lost them an even bigger housing problem exists that really hasn't been addressed. What do you do if your house is worth less than the loan you have on it, and you are still making your payments on time? First of all you are not guaranteed a profit when you make a purchase of any asset in this country, even government issued assets. On the other hand, the government has moved to stop foreclosures and to modify loans for those who have found themselves on the precipice of the foreclosure mountain. There appears to be a conflict of epic proportions.

Lenders have been encouraged to work with those homeowners who are demonstrating, through late payments or no payments at all, they cannot continue to stay in their own house. I am in favor of anything a lender can do to help those in this situation, but what about those who are still able to make their payments and are realistically in the same condition as those who aren't making their payments? Many people have said to me that they haven't any equity left in their house and now cannot make the payments. If there was some equity left would they find a way to make the payments? I wonder.

People do not want to have to miss payments to get the lender's attention, but on the other hand lenders cannot simply help everyone in the non equity position or they will not be able to stay in business. Is there a happy medium? If you ignore the problem it results in more and more innocent homeowners being hurt by foreclosures and are therefore exacerbating the problem. When the majority of the sales in an area are foreclosure sales, every homeowner in that area is being affected as their home is decreasing in value, at least temporarily.

Allow me to follow the trail a bit further. In our country lenders sell the loans they make to investors which gives us the capital to expand the housing market. When a loan goes bad the investors are the ones that end up losing the money. When the bank modifies a loan, the investors get less return. Who are the investors? In many cases they are us, through our investments in retirement plans of all kinds. Do we want to see our retirement funds decrease? I think finally a question is raised that I can easily answer. That answer is a resounding no!

What then should we as a nation do to resolve the aforementioned problem? Before we leap to an answer let's look at the alternative to home ownership: rental housing. You do not have to own in this country to have a place to live. You can rent a house, apartment, a boat, a warehouse etc. The missing ingredient in this particular sector is the ownership of the facility that is being rented. The owners are very similar to the ones mentioned above. Some have lost their places to foreclosure already, and many more are in or about to be in foreclosure. In some areas of the country tenants have been evicted after the foreclosure and in other places tenants have paid their rent to owners on the verge, who have kept the money and not given it to the banks. Those tenants are also being evicted.

Last, but not least, rents have taken a substantial increase as demand becomes greater meaning that renting isn't quite as good as it used to be.

There are simply two sides of the story. Save the economy by stopping the foreclosures, at any cost? Or let it go and watch the real estate industry reel, along with the lenders, Wall Street, the banks and a number of foreign countries who are holding a large amount of our loans and financial obligations? The road to recovery for the real estate industry is through lower mortgage rates, fewer foreclosures and ways and means to get the public buying houses again. The other side of the story dictates doing nothing to help the real estate industry, let housing prices continue to fall and let the foreclosures mount. Again, if that happens other industries, cited above, will also shrink.

If we do decide to save real estate, how do we deal with the initial problem I mentioned in this column: the thousands of borrowers on the verge of adding to the already too large number of foreclosures? I believe most of the problem can be handled with fiscal policy instead of the way we have gone up to now with monetary policy. The only problem with fiscal policy is those borrowers who need help are usually unemployed or underemployed and do not pay taxes. But consider this: why not use accelerated write offs, investment tax credits and a forgiveness of withholding except for social services? This would result in a bigger deficit for the country, as does the monetary policy, but would give borrowers immediate help with their cash flow which might act to stop potential foreclosure problems.

Is this the best idea we have? I can't believe it would be, but it is an idea. We need more ideas, from more people as quickly as possible. We need to discuss them, dissect them and hopefully come up with something that can work. What we don't need is more money thrown at the problem, hastily, without being carefully thought out because we neither have the money, the time or the patience to watch a great nation brought to its financial knees by politicians whose main goal in life is to be re-elected. It is our country, our government and our problem. It is up to all of us to help solve it or at a minimum keep others from making it worse.