Jonathan Spurr, a likeminded colleague of mine and a wholesale account rep for 18 years came up with this idea which we just pitched to the Arizona Department of Housing . This could be a model for all us to help our individual states reduce the likelihood of strategic default candidates and use our expertise to put more discretionary income back into our states.

How do we fix the housing market?

We first have to accurately identify and define the largest current threats to the current housing market. We have to do this without pointing fingers, placing blame, or adding partisan politics for political gain to the mix. This must be a bipartisan effort and involve industry leaders that have proven themselves as professionals and not just self proclaimed experts that happen to know someone in power that gives them the opportunity to speak.

The solutions must be acted upon quickly and without the dilution of “PORK” and other congressional tactics to stall legislation. And most of all it must benefit all tax payers, not just the worst off home owners. If efforts to save housing focus only on the most distressed homeowner, there will only be further divide in the support of the American Taxpayer. It must not have a massive price tag and under no circumstances can it increase taxes, or it will just be another failed attempt at a bail out.

In my opinion below are some of the largest threats to the current housing market.

The next wave of foreclosures, “Walk Aways”! The government is focusing all of its current financial resources trying to modify the mortgages of borrower who are delinquent on their payments, have become unemployed or suffered a drastic pay cut, or took on mortgages they couldn’t afford because they believed they could refinance the loan when home values went up again.

However, the 85% + of homeowners who have been making their payments on time have been largely ignored. This group has watched their home's value continue to plummet, they have tried to refinance into lower rates without any success, diverting several thousand dollars of discretionary income that could have come back into their state to very likely out of state, if not overseas investors. For over 2 years “on time” homeowners have read or seen on the nightly news story after story of irresponsible home buyers and/or financially illiterate home buyers that were taken advantage targeted for government assistance with rates as low as 2%. 

These “on time” homebuyers call their mortgage companies or brokers up to find out if they can take advantage at least of the rates in the high 4% range, very likely spending $400 to $500 to play "appraisal roulette" only to find out their values have dropped so much, that the lenders will charge them an extra 3% in closing costs (discount on the pricing grid created by lenders) that makes most refinances cost prohibitive.

Wasn’t the intent of HARP and HAMP to allow ALL homeowners to work with their current lender to modify or refinance their existing loan and take advantage of lower interest rates and lower monthly payments? If delinquent borrowers who want to modify a loan aren’t subject to a 3% pricing adjustment for being upside down 105% to 125%, why should people who are not delinquent be subjected to this adjustment, since their value drops are the result of the worst downturn in real estate history—not bad financial decision making on their part?

Somewhere along the way someone decided that the borrower must demonstrate a need for a lower payment; simply being upside down in your home is not enough of a reason to allow you to take advantage of lower rates. This has quickly ballooned into NY Times broadcasted advice to “STOP MAKING YOUR PAYMENTS” –the birth of the strategic default movement.

Possible solutions to this dilemma?

Suggestion #1:

Remove the pricing adjustments for wholesale and retail loans where home values are 105% to 125% of the new proposed loan.  If lenders are willing to modify loans down to 2% for delinquent homeowners without a mark up in the cost of the rate, why should there be a 1% to 3% mark up for ON TIME borrowers who have lost value?

Suggestion #2:

Since banks will likely be unwilling to remove the 1 to 3% loan pricing mark-up, why not subsidize this cost on a state by state basis, and partner with nonprofits for accountability to establish eligibility for the “Modification Payment Assistance” program (we just proposed this to the Arizona Department of Housing)?

Let’s take the $125 million Arizona has been given for foreclosure prevention.

The current proposal to the Treasury suggests 4000 homeowners will be helped with a new “principal reduction” modification program that will enable $30,000 of principal to be written down on borrowers who are at least 60 days late on their mortgages.
 
What if half of that amount was used to pay the 3% hit on an average loan amount of $150,000 for houses in Arizona that are 105% to 125% upside down, but on time with their payments.

Please check my math, but on average the cost of the "subsidy" for the most upside down, but on time paying homeowners would be $4500 per loan, and would potentially help 13,700 of borrowers obtain rates at the lowest levels in history.

You’d still have $62 million to throw at the existing modification programs if you think servicers and investors are actually going to “play ball” with principal modifications—a tall order considering 97% of the current payment reduction modification loans have failed to convert to permanent modifications.

Let’s say on average that the 13,500 of borrowers will save at least $150/month for the next 5 years with a 2 year break even on costs. That is $24,300,000 of payment savings for the most credit worthy homeowners that could go back into the Arizona economy, instead of into the servicer/investor pockets (the same servicer/investors that been so reluctant to accomodate a higher "permanent" modification rate with the existing HAMP offerings).

If we have a 5 year recapture on the subsidy, then the state “breaks even” on its $62 million investment in less than 3 years.

Participating mortgage companies/loan officers would have to be certified by nonprofits for participation and cap their profit at 1%; the nonprofit counselor would determine eligibility, certify the 'cost/break even" goal was met prior to funding, and provide an annual follow up for  financial education counseling would be required to get the subsidy—perhaps the beginning of a new mortgage education partnership between the for profit and nonprofit housing world?

Final point: if we only offer the lowest rate and cost mortgage assistance to the most at risk homeowners, at what point do the “on time” homeowners decide that it is more beneficial to become a distressed homeowner?