The idea of “the haves” and “the have nots” would be drastically redefined will ultimately impact all of us either directly or indirectly. Just take a minute to think of friends, relatives or even your children that may not be able to buy a home and enjoy the “American Dream”. There is something very special about knowing that you own a piece of land – and the home that you live in. It goes back thousands of years to the essential and fundamental human senses of safety, wellbeing, and comfort that are the very essence of our global social structure as human beings. We must do everything we can to preserve the ability for all economic classes to have access to viable home ownership, which has been a passion of mine for over two decades. We are out of time and it is essential that the government acts promptly and accordingly to ensure that our nation remains strong and a land of opportunity for the masses – not just opportunity for the few. 

Forget, for a moment, all the terminology that you’ve heard and just envision a $700 billion dollar stack of mortgage loans standing in front of us. Before you can do this, you will first need to stand way back - because the stack of one-inch-thick legal files that make up a standard mortgage loan stacked flat on top of each other would make a stack taller than 10 Mount Everests combined. We’re talking about a stack of loans more than 59 miles high. Boeing 737 typically fly, on average, about 6.5 miles above the earth – now times that by 9! Just take one single loan file off the stack and thumb through it. It’s a legal-sized manila-folder, about an inch of paper resting inside publishing an actual human being’s established economic and credit profile – a real person paying on one single real mortgage. Hold on to that file for a moment and we’ll get back to it in just a minute. 

I want you to imagine that you are looking way up to the top of this stack of files (you’re going to need a telescope to do so), now picture the top twelve percent of the stack – the last 7 miles. This represents the amount of mortgage loans that are in default – but not necessarily in foreclosure. The rest of the stack is loan files that are performing or sub-performing (meaning payments are paid on-time, or almost on time). The entire stack is made up of real people, with real challenges. Yes, they should be responsible for their actions as these people did not have the ability to judge for themselves what their limits were. Was it the lender’s fault or the borrower’s fault? I think it was both – but this article is not intended to focus on blame, but more to focus on a solution. How do we get that enormous stack of loans paying on time and stay paying on time – and, ultimately, get the entire tax payer dollars paid back to them rapidly? Quite a task, if I do say so myself.  

Now let’s assume that the names on the loan papers within the file are Jack and Jill Everest. Let’s assume that they are only one month behind on their mortgage, they love their home, they need a home for themselves and their children and would do just about anything they could to keep it that way. However, two major questions keep banging at their heads every morning, day and night. First, how much of this can we take? And second, what is our home even worth?  

The first question is due to the fact that their rate was just dramatically raised and they can barely afford the payment, which is drastically impeding their lifestyle. The second question has arisen simply due to the fact that the borrower heard that the government just purchased their Mortgage Note for pennies on the dollar (anywhere between 50 cents to 80 cents on the dollar). If the actual Mortgage Note is only worth cents on the dollar, what could their home actually be worth, and in turn, what are they fighting for? This is, in fact, the Genesis of the issue at hand – what is the value? There is a major disconnect and misunderstanding of “financial paper value” and actual “real estate – or real value”. It’s very simple – if a bank is motivated enough to raise cash by selling assets (Mortgage Notes) at a massive discount, we shouldn’t abandon the idea that the actual real estate that acts as collateral behind the Mortgage Note has dropped as well. In fact, the value of your home is based solely off of one simple notion – what will someone else pay for your home if you put it up on the market? Now, when there is a large supply of similar homes in your area, and at the same time there are only a handful of potential buyers – sellers must provide incentives or reduced prices to win the buyer. This is simple “supply-and-demand” in action, which is the other side of the coin in this turbulent real estate cycle. If the homeowners, Jack and Jill Everest, finally give up based on an inability to perform on the new or adjusted terms of their Mortgage Note, or simply misunderstand the “true value” of their home and abandon ship – this increases the supply of homes on the market (more choices for the home buyers) and ultimately plays into further real estate price declines.  

Look back at that massive stack of mortgages that is the 700 billion pound gorilla in the room (and the room is the Treasury Department). What if every single one of those mortgages, including Mr. and Mrs. Everest’s, had an interest rate of less than 1%? Remember, these are real mortgage loans, real people – people that want their home. I can pretty much guarantee you that most of the loans would perform until the home was sold (average in the U.S. within 8 years – and we’ll touch on that further as we go on), or until every single payment has been paid and the Mortgage Note is paid off. Wait a minute – we just found something here that is very important, and that is the actual value and principal balance of the Mortgage Note! We’ve all been hearing, “these Mortgage Notes are only worth so many cents on the dollar” – and that sentiment is, in fact, the poison that will take us all down. Forget the notion that the Treasury needs to sell these mortgage loan assets for more than they purchased them for – that is ridiculous – it just can’t happen! What the Treasury must do is stabilize the actual principal amount of the mortgage itself by creating a way for the borrower to successfully perform on it. Look, everyone pretty much has the notion that at some point in time the value of their home will go back up in price and everything will eventually stabilize. But what the problem is now, if Mr. and Mrs. Everest lose their home – is it will be 15 to 20 years before they will ever be able to qualify for a home again – and that is an epidemic just months away from becoming reality – regardless of the government’s intervention.  

By stabilizing the individual borrower and helping to create the ability for this massive stack of mortgages to be paid on-time by modifying their current interest rate to less than 1%, the Treasury will, in an instant, nail “value” to the wall – they would be able to prove that the value of a $150,000 mortgage is in fact worth $150,000. Who cares what it would sell for in the secondary market – just DON’T sell it! If the borrower is performing on the full balance successfully, the US Treasury has a responsibility to the tax payers of America to service these mortgages until the borrower sells their home or reaches maturity. Of course families would keep their homes for much longer with a rate of only 1% or less – but I would argue that at least sixty percent of the portfolio would payoff or mature within the first ten years – and the rest would trickle down over the remaining twenty years. This would guarantee a lot of things;

1. A drastic decrease in foreclosures,
2. Tax payers would eventually get at least the original $700 billion back over time – par is a good thing,
3. Millions of families would have new found discretionary money that would, no doubt, bleed into the economy – and I am talking trillions!

 For the first time “trickle down economics” would be a useful economic stimulus emanating from middle and lower income families instead of the customary higher-income corporations.  

You may be wondering – what if the borrower still can’t afford the house payment even at a 1% or below interest rate? This is where it really gets interesting. My first job in mortgage lending back in 1988 consisted partly of processing the paperwork on what are known as “FHA Fully Qualified – or Simple Assumptions”. A borrower wanting to assume another person’s mortgage (buying a home from family, friends or neighbors), if the terms of the underlying mortgage on the property was better for the new homeowner than the current market rates and terms, they could request that the servicing mortgage lender allow them to “assume” the underlying mortgage. In this case, I often witnessed the current owner relinquishing the current equity, if any, and allowed the new owner to assume the mortgage with no down payment – or very little down payment. The cost of the actual assumption, if memory serves me, was about $550.  

Now I ask you – (on Treasury held mortgages) for the group of borrowers that still cannot afford the mortgage even at a rate as low as 1% – how fast would they become consumed by the public if the public was able to assume these mortgages at a 1% interest rate with an extremely low payment - and zero down payment? All that they would be required to do is to qualify under the most liberal lending terms in the world (FHA lending guidelines) and come up with the $550 assumption fee. I’ve tested the acceptance of this theory with anyone and everyone I have come across – colleagues, family members, people I’ve sat next to on airplanes. They all say the same thing, “sign me up – I will take one now”! And guess what – they would not only qualify, they would cherish and pay every payment on a once in a lifetime opportunity for millions of families to buy a home – there very own piece of America – the American dream! Why do we need to allow this “bail out” and national problem to make it virtually impossible for many Americans citizens to improve their living standards and or buy a home, when the government has an opportunity to allow, for the first time, these same citizens to be the heroes and save our nation’s real estate values?  

I spent about an hour making a list of friends and family members that I knew that would benefit from this initiative and take advantage of such an opportunity, and I came up with 11 families – just me! If you think about it for a minute yourself I believe you will have a similar outcome – even if you would not utilize the program yourself. Millions of families would rush to apply for such an opportunity – and a great number of Americans would, no doubt, qualify.  

Let’s spend just a few minutes on fulfillment of such a program. A huge problem with this $700 billion bail out package is that no one, even the Treasury themselves, even know how they are going to deal with all of the paperwork and management of the behemoth task of purchasing these mortgage – but more servicing them and trying to sell them back into the secondary market at a profit – or break even. However, the plan I have suggested above allows for many working parts to naturally work in harmony – it practically solves itself. For one, there are many mortgage lending fulfillment operations (hundreds of them in fact) that could aid the Treasury in the assumption process and earn the $550 assumption fee as a revenue source. The Treasury could also make a demand on the financial institution that they purchased the loan from to complete the assumption paperwork. If the institution had the ability to make the mortgage in the first place, they sure as Sunday can complete the assumption paperwork. In addition, there should be no appraisal requirements on these transactions – so all the credit package consists of is the borrower’s credit, income documents and proof of the $550 fee.  

Please remember that we are fighting fire with fire here. In addition, this is not a new concept. The FHA had, in the past (not sure what the HUD Repo terms are now) been selling thousands of homes per year to the American public under their “HUD Repo Program”, whereas potential homeowners bid on the property and the winner takes all – as long as they could qualify under FHA income with very liberal credit guidelines and agreed to the value being what they agreed to pay for the property – even if it was purchased for more than the home is worth. It was a hugely successful program – and this was another one of the programs that I processed in my early days in mortgage lending back in the late 80’s and early 90’s. Why was it so successful? Simple - because people were able to buy a home with only a few hundred dollars for the “processing costs” and basically take over the property. The FHA figured that anyone willing to buy the home that had a stable income was better than the home being vacant – regardless of what the loan-to-value (LTV) was at the time. They were right – and it drastically helped to stabilize markets! 

The public has lent $700 billion to the government so that they could buy a whole bunch of these mortgages from banks. If they buy them and the value continues to fall, and there is no one interested in “stabilizing the value” by staying in the home, buying the home and ultimately performing on the Mortgage Note – the values will continue to fall drastically (both the financial paper and the real estate values) and, at the end of the day, the American tax payer will lose in two extreme way. First, the Treasury will not be able to stabilize the paper value, or keep people in their homes that can’t afford them – and that $700 billion will start to drastically devalue and dwindle. If this happens, there is no possible way that the government can “give it back”, as they have made so clear in promises. And second, as more foreclosures in your neighborhoods occur, the buyers will have more choices, there will be more supply on the market and ultimately the prices of real estate will continue to fall. Basically – your largest asset, your home, will go down in value. So I ask you these two questions; first, do you want the money back that you lent the government to solve this problem? And second, do you want to vote for a program that allows the people in this massive pool of mortgages to stay in their homes, mow their lawns, pay their payments and drastically help keep the foreclosure numbers down? 

I know it’s a big pill to swallow. It is not fair for the responsible citizen that didn’t borrow too much, or accepted a risky loan program and has always paid their payments on time to condone a program that rewards the citizens that did not practice such self-control. It took me a lot of soul searching to answer that question for myself – and I almost did not write this blog. I would never expect anyone in the US to simply think this is the right way to do it. This is an obvious solution – and by no means would I ever ask the public to accept it without some contempt and frustration. If the government is going to jump in, borrower $700 billion from the public and try to solve this problem – we had better let everyone involved go all the way to make the maximum impact in this bail out initiative. If they sit around and try to figure out how to market these mortgages and don’t do something fast to keep people in their homes, or try to get others in the home on the same mortgage – there are some big troubles still ahead. Remember the 59 mile high stack of mortgages. This will not simply go away now that the government has purchased these mortgages – or working on a plan to do so. What’s the next step after that is completed? The answer to that question is totally unknown – especially to the Treasury Department itself. The plan above is the only way to stabilize the value of the paper and the real estate that it is written on. With millions of people staying in their homes and others buying these homes on “FHA style fully qualified assumptions” – trillions of dollars of spending would trickle into the economy – saving jobs and improving the nation’s current uncertainty. This plan makes sense. It will work if only it could become a reality. 

I ask that you consider this plan for a few days before you pass judgment on it. I believe you will find the same acceptance of it that I and many other good citizens I know have done with vigor. Once you have – we then need to act! Public opinion will be a huge driver in the decisions that are made in Washington, DC when constructing and executing their plans to deal with this $700 billion dollar challenge. If we all send this article to our friends, neighbors and relatives that value their current equity and would like to see millions of good citizens have a “one-time-only shot” at home-ownership (that could also be passed on to their children) –  I believe this message can be sent far and wide. We need to write to our congressmen and urge them to share this plan with the Treasury Department. If there are enough US citizens demanding that a program such as this at least be considered – they cannot afford not to act on it, or at the very least seriously consider it.  

I appreciate your willingness to read this lengthy article and proposal. If you reach out and grab a loan file off of that huge stack you will find that these are real people, with real problems. These problems will not simple “stay in the stack”, but will actually spread into every neighborhood in the nation and burden the world economy for decades if the right steps are not taken. I believe that if this plan is executed there are very few negatives that will come of it, except the unfair aspects that are no doubt an ugly reality. But, the alternative reality is a much bigger pill to swallow – and with that pill I assure you none of us will have a choice. Pass this onto a friend or relative and make our voices heard!