Note: This is a first for the AVC blog. I did not write this post. It was written by Jeff Minch, known to this community as JLM. Jeff has been leaving comments on this blog for the past six to nine months and I've enjoyed reading them very much. Jeff has a very different view than I do about politics and about other areas as well. But you cannot read his opinions and not come away impressed and thinking differently. That's the kind of voices we have here in our community and I am excited about sharing some of them with all of you every once in a while. I don't plan to do this very often, but I do plan to do it from time to time. With that said, please enjoy Jeff's thoughts on the President's housing plan.
Taking it to the Hood
The Homeowner Affordability and Stability Plan
Fred Wilson asked me to react to the President’s housing initiative and I am honored to do so. I find “A VC” to be the single best blog that I have the opportunity to read primarily because of the content offered by its participants and their obvious qualifications but also because of the comity of the dialogue and the ability for strong willed folks to disagree without being disagreeable. Fred has chosen some great blog topics and while there is a “forum” quality to the actual dialogue, it is the selection of the topics which focuses all of that intelligence.
The TARP was for Wall Street. The Stimulus was for Main Street. The HASP is for the Hood. There will be much to like and there will be much to dislike. A frame of reference:
1. Our Nation was in great measure formed by folks who had a desire to have their own house. A gross oversimplification, I am sure but a bit of truth nonetheless. Increasing home ownership in the United States after World War II was one of the single most important elements in the wealth creation and evolution of the culture of that extraordinary time.
2. Housing is both physical and emotional as it is where our sweetest memories are made, discussed and lived. It is where our hearts are and if we fail in this arena we have more than just financial failure, we have broken hearts and a diminishing of the American dream. [If you knew me well, you would be amazed to hear me say something so “squishy” like that but I have my own reasons. More importantly, I truly believe it.]
3. Housing --- or perhaps I should say abuses of housing, particularly housing finance --- is at the root of our current financial problems. There is plenty of blame to go around without resorting to political finger pointing. A good idea got swept up in the euphoria of the times and we allowed basic rules of finance to be violated at the personal, industry, banking, regulatory, legislative, GSE and securities levels. Housing was the spark which ignited the flames which fanned out of control. It is good therefore that President Obama is addressing a root cause of the problem.
4. Homes are very important to the fabric of our Nation from a social perspective and while I cannot readily quote any supporting figures, I can say with some conviction that a child raised in a stable home is more likely to become a contributor to society rather than a cost center to society; and, conversely the opposite is also true. [At the end of the day, all we are trying to do is to get the taxpayers to outnumber the recipients of government largesse.]
5. Home equity represents the most important (and generally hidden) asset in most folk’s lives when it comes to building long term retirement equity.
So, I am a big fan of stable homes for a number of reasons.
On the whole, the HASP is a damn good start but it is only a start. Is it perfect right out of the chute? Hell no. Here are the things I like in the order in which I like them:
1. I think the probability of the plan working is dramatically heightened by the President’s wisdom in originating the plan in his office rather than having the Congress draft legislation and running afoul of the partisan minefields such action would generate. President Obama can barter a bit of political capital in this endeavor by direct sponsorship and can avoid the unifying opposition of having Speaker Pelosi being the plan’s sponsor.
2. I just love the idea that a Federal Bankruptcy Judge can intervene in the dialogue between a bank and a borrower and take immediate and almost unappealable action to force a mortgage settlement. This is a shadow of the “cram down” provision of bankruptcy law but it is even more effective because neither party regularly appears in that Court and thus there is a real balance of terror. Federal Bankruptcy Judges are the most powerful Judges in the judiciary, they are experienced in dealing with tales of woe, they are very decisive and do not suffer fools well. It will also motivate banks to settle things quickly once they know the model which will be used. This will help deal with all of the mortgages, including jumbo mortgages, which are not held by the GSEs. The Federal Bankruptcy Judges I know will be able to modify a mortgage in about 12 minutes.
3. The application of a specific financial yardstick at 38% of gross income able to be “bought down” to 31% is pragmatic. Of course, this will be complicated by the ability of a borrower to free up other funds to inject equity but it is a good start. I would have liked the final residual number to have been 25% because I think we are still headed downward for about 12-18 months.
4. The other important element of this buy down approach is the ability to now put a definitive price on the formerly “toxic” assets. Remember, the most important element to trading this stuff off balance sheets has been the inability to price it. This solves a lot of that problem.
5. Discrimination between those already in the ditch and those who are at the edge of the abyss as well as those whose only real problem is the declining value of their home is useful and while it doesn’t cover every single circumstance, it does cover a huge portion.
There a couple of areas which merit a bit of discussion and undoubtedly will require some modification.
1. First, let me ask that everybody go re-read the Parable of the Workers in the Vineyard. Why? Because like laborers in the vineyard, the HASP will leave some folks feeling like they were mistreated because they were prudent in their mortgage dealings and will not benefit from the HASP. My answer? “Friend, I am doing you no wrong.” There are just some things in the life of a Nation in which you simply cannot get the toothpaste back into the tube regardless of how firmly we believe that is the just solution.
2. The plan is simply too complex on its surface. This is a problem with President Obama, he is smart and he assumes that others are equally smart. The average Wharton MBA could not read the Executive Summary of this plan and “brief back” its provisions from memory. The borrowers? Hey, they didn’t provide income documentation and were not interested in a lot of paperwork to begin with --- do you think they are going to come trotting into their bank with a bunch of documentation now? The plan has to be simple enough that a high school grad (OK, in the top half of his class.) could understand it.
Does a fish taste any different if you catch it with a worm, hook, bobber, line and a cane pole? KISS --- keep it simple for the stupid!
3. The plan does nothing to stop pending foreclosures. I would like to have had a 90-day moratorium on foreclosures currently pending. It is outrageous that banks receiving TARP funds are not called to cooperate fully with all government sponsored bailouts. They were first in line to receive assistance and they should also be first in line to provide assistance. These guys owe us!
4. I hate the provision that if a borrower who has received a loan modification is current in their payments that they receive $1,000 annually for five years. When a cute little mouse has his leg removed from a trap, he does not negotiate for a piece of the cheese before scurrying away. This paternal approach is really insulting to all involved. Everybody should get one chance to be saved with no do overs.
5. I wish the plan had a provision that the “work out” financing could also be applied to first time home purchasers in order to soak up some of the excess inventory out there. Missed opportunity to work down the supply of troubled housing and for banks to reduce their REO.
6. There is a sense that the mortgage modifications are only going to be for five years. This is silly. Make them permanent and make the solution permanent. Five years is not very long for an asset which is normally financed over 30 years and which can last for 100 years. There is ample evidence that re-default rates are as high as default rates. Solve the problem permanently.
7. The government should get an “equity kicker” for their trouble. If you participate in the plan and peg a new value on your home, then the government should get either a par payoff of a 25% equity kicker above the marked down price for the next ten years. Why not?
In closing, let me say that of the three plans advanced thus far I like the HASP the best. Remember we are only talking about a national mortgage delinquency rate of something less than 7%, so while the problem is huge in terms of dollars it is really more manageable in terms of the numbers of folks impacted. We desperately need a win on the economy and this may be a promising start.
I rate the TARP at zero probability of working because I think that Darwin was right all along. I rate the Stimulus at 25% with its most significant failing its disconnect between the spending and the creation of jobs. I rate the HASP at 50% with the possibility to engineer that upward with some simple modifications. Thanks for listening.
Fred's Update: You might enjoy watching the Rick Santelli rant on CNBC in conjunction with this post. What a great discussion and debate we are having here. I love it.
Fred's Update 2: I measure the success of a post by the number of comments. By that score, JLM hit one out of the park with over 100 comments and still growing in less than 24 hours. Well done JLM, great topic, great post, and great discussion. You will be a tough act to follow.