Lots of plans out there. Lots of tax dollars being thrown into the water as a lifeline. As a guy who likes to see capitalism work its way through problems that the market will solve, given time and a lot of pain, I have mixed feelings about it.
So here’s my plan to stimulate things in the trenches, where it all got bad — in real estate. Get that market moving, and the banks get cash, the builders start building, Home Depot starts rolling, Circuit City starts selling…trickle down and all of that.
1. Fed takes the $500b or so that they’ve pulled from the bank bailout plan and gives it to Fannie/Freddie.
2. For the next 12 months only, Fannie/Freddie offer 4.0% interest financing to any buyer of a primary residence, or to any homeowner doing a refinance (no cashout, just principal refinance).
3. In five years, these loans adjust to today’s market 30 year rate, and term out for the remainder at that rate. 5.75% or so would be par today.
This does several things:
• Banks that hold the existing mortgages get cashed out. They’re going to want that cash to help with their other issues. Some of these loans are toxic, most are performing fine. Either way the banks will like this;
• Buyer’s increase their purchasing power considerably. Unlike recent years, they’ll need to qualify for these loans with credit and debt:income, but at 4%, a $300,000 loan costs buyer $195/month less. This also brings people into the buyer pool who might be renting;
• Existing owners with ARM’s or higher interest loans will save money. This is virtually everyone who has a home loan. So it results in fewer foreclosures. More free cashflow to put into cars, big screen tv’s, or gosh, maybe savings? Not a bad time to be pumping some money into that IRA;
• Fed’s cost of funds is so low as to make this an attractive spread. And the likelihood of full recovery of our $500b is high. Some number approaching 100%. Banks that do first mortgage loans to qualified buyers have a very low, single digit default rate;
• REO’s get sopped up. Inventory stabilizes. Prices stabilize. The banks that are going to get stuck with empty houses, that loaned “too much” two years ago, they take their lumps. Most of the hits have probably already been taken.
Seems to make sense to me. Get buyers moving into the market again, not in a crazy way, but in a responsible way. Is creating subsidized, or artificially low interest rates, a good idea? It’s certainly a not free market idea…but I think it will get things moving us towards the light at the end of the tunnel.