[H] Homeowners

Dear Friends,

This morning I read an article in The New York Times about some very vague plans by the Obama Administration to try to help homeowners with their mortgages in an attempt to help the housing market and the economy (here).  I find it strange that the focus is on the housing market and the economy and not a government trying to help individual homeowners who have been devastated by the excesses of Wall Street.  In any case, the Obama Administration has had various plans before that have fallen far short of their goals.  After reading the article, I was depressed that there were no concrete ideas that would provide any relief.

Shortly after reading The New York Times article, I got an email from Michael Lissack.  I do not know him or know how I got on his email list, but I was intrigued by the subject of his email "Fixing America's Housing Finance Crisis".  He has an interesting background as a short Google search turned up.  Here is his website as well as a link to another article about him in The New York Times.  You will note that he graduated from Williams College as did I so he is certainly worth listening to.


I am not sure that his idea would work, but it is an idea that should be considered and a clear indication that there are people with real ideas that could help our country if only President Obama would break out of his small circle of advisers and entertain some bold thoughts.  Here is the email in its entirety.

This past week the national media has devoted considerable space to America's mortgage problems.
Today the NY Times suggests that Fannie Mae and Freddie Mac may refinance trillions of "current" mortgages -- and thereby save homeowners billions.
But this solution does not address the 20% of American homes which are underwater (where the mortgage exceeds the current value of the home).
For "underwater" homes “Reducing principal is a better solution than lowering interest rates …” But how can this be done without banks having to take the full loss write-down and without rewarding reckless borrowers? The answer lies in an equity SWAP.    Uncollectable current debt is swapped for future appreciation. Banks should:
1.      Reduce the first mortgage to 80% of current house value.  This is a traditional conforming loan.
2.       Write a zero-interest second mortgage with principal value equal to the 20% difference between home and first mortgage value.
3.      Hold a standardized, stand-alone contract sharing 50% of appreciation (if any) above current price.
The homeowner is no longer “underwater” and has a much more manageable monthly housing expense. The second mortgage plus the equity sharing are a future cost, but not until the homeowner sells the house.
The lender has the second and equity sharing to offset their principal write-down.  Both of these assets could be pooled and sold into the capital markets. The result for the lender is far better than foreclosure (which incurs 30%-40% reduction in current value), and the homeowner keeps the home.
If we fix housing, we fix the economy.
Please pass this message to your elected officials, your banker, and to everyone you know of influence.
If you can help with this idea please email me at lissack "at" lissack "dot" com

Michael Lissack
Executive Director, the Institute for the Study of Coherence and Emergence
2338 Immokalee Rd., Naples, Florida

Thanks for reading and please comment,
The Unabashed Liberal

 Michael Lissack