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In 2008, the housing bubble burst leading to a financial crisis that sent the economy into a tailspin, drying up liquidity. Home values have dropped precipitously and continue to drop in many major housing markets. The housing bubble was caused by government policy to keep mortgage interest rates low and to encourage sub prime lending practices that increased home "ownership" across America. If the government didn't directly cause the housing bubble, its policies certainly encouraged the inflation in housing prices and development of a market in mortgage-backed securities that turned the inevitable correction into a financial crisis. The deep recession led to unemployment, which increased home loan defaults and mortgage foreclosures, causing home prices to drop further, to the point where existing homes now sell for substantially less than its costs to build homes.
The government stimulus passed by the President and the democrat-controlled House of Representatives and Senate did nothing to address the precipitous decline in the assessed value of homes, which caused the financial meltdown.
Michael Lissack, a famous (or infamous to some on Wall Street) whistleblower who once worked for Smith Barney, has proposed a solution to the underlying problem that is holding back America's economy. He proposes a mechanism that will establish a new floor for home valuations for the majority of homes that are now underwater (assessed value of home is less than the amount of the home loan). He proposes the following:
1. Refinance 80% of current assessed value of homes in a conventional conforming loan / first mortgage.
2. Provide a second mortgage (Lissack proposes a zero-interest loan) for the difference between the second mortgage and 100% of the current assessed value of the home.
3. In exchange for the write-down to the current assessed value, allow for banks to hold an equity interest in the up-side of the home, when sold, if any. Lissack proposes a standardized, stand-alone contract (and presumably a lien that must be satisfied at closing) for 50% of appreciation above the current assessed value of the home.
Presumably, all home owners would be allowed to participate in this program, and the mortgage companies and banks would be either encouraged or required to participate. As a result, all homes would no longer “underwater” immediately. Monthly mortgage interest and principle payments would be reduced, and the freed up cash would be available to stimulate the economy. The second mortgage and equity sharing contract would be a future cost to the home owner, but this cost would only be incurred upon selling of the home for a price above the current assessed value. This would put a floor on home values at current prices, encouraging a return to a stable housing market.
Lenders could look forward to the equity-sharing return on investment to partially offset the loss caused by writing-down home loans to current market prices, instead of taking losses in foreclosure sales that continue to drive down home values.
It would be an interesting exercise to compare the costs of Lissack's proposal to financial institutions compared to the continued uncertainty and costs of foreclosures. The primary and secondary mortgages and equity-sharing arrangements could be pooled and sold into the capital markets, particularly as housing prices start to rebound.
Possibly, the economic result for the lender would be far better than the costs of foreclosing on homes, which Lissack estimates incur 30%-40% reductions in current values.
Thursday, August 25, 2011
Tuesday, August 2, 2011
9-11-01 Ten Years Later
I returned to New York from Santorini, Greece, the day before. My vacation was interrupted due to pressing matters that could not wait.
On 9-11-01, I was walking to work at One Broadway, when the first plane hit the N. tower. A gaping hole opening up with leaping flames. Pedestrians with their faces and eyes locked on the catastrophe stood frozen, awestruck, but at that point we didn't know it was an intentional act of terrorism.
I proceeded to work, which was only a few blocks from the twin towers. As I neared One Broadway, a second commercial airliner blasted its way into the S. tower. Even though I was walking on the street several blocks away on the opposite side of a high rise, I sensed the blast, burning paperwork drifted down around me from the offices impacted by the exploding air-fuel mixture released by the disintegrating aircraft as it merged with the S. tower. A taxi stood motionless on Broadway. Its driver listening to the radio. When I asked what had happened, he explained that planes were crashing into tall buildings all over the city and at the Pentagon too. Although erroneous in the details, this report made clear that our nation was under attack.
I continued on my way. I took the elevator to my office on one of the top floors of One Broadway to collect some paperwork and to email friends and family that I was OK, because my cellphone wasn't working. Before I could click send, the first tower fell. A pyroclastic cloud of ash and dust entombed the financial district, turning day into night, made darker still by the immediate loss of electricity, phones, Internet and continued absence of cellphone signals. I stuffed my files in a red backpack that I normally used for law books; I was a full-time patent agent and legal intern, attending my last year of law school, at nights.
Proceeding to the nearest stairwell, I met a panicked administrative assistant, calmed her and helped her to evacuate the building, nine floors down a dark stairwell in an historic building considered to be one of New York's first skyscrapers. The lobby guard had closed the entrance, afraid to let anyone outside in or anyone inside out. Pieces of fluffy flotsam drifted in the smoke, dust and ash that had once been a clear, late-summer sky. After waiting too long without information, I convinced the guard to allow me to leave and to allow desperate tourists from the Ellis Island tour boats sanctuary in our lobby.
Two disoriented tourists decided to join me on my expedition northward, out of the financial district. The second tower came down before we made much progress, and a churning cloud of choking dust and ash advanced up one of the cavernous streets in our direction. My band took refuge in a bank lobby.
After some time huddled in our refuge, the density of the dust dissipated enough to continue the expedition northward. All were now covered in a fine gray dust in a surreal landscape. A makeshift first aid station passed out dust masks to passersby. A corner bodega passed out free bottled water. Nearing the Brooklyn Bridge, we finally emerged from the dust cloud, and, for the first time, I was stunned to see that the towers were no more.
After directing my companions toward the bridge to Brooklyn and safety, I turned westward toward my home in the West Village. It would take more than an hour navigating checkpoints and barricades before reaching my 350 square foot West Village apartment, where I could shower away the dust that covered me. Then, I went to the Internet cafe on Bleeker Street to finally let those concerned about me know that I was fine.
In the weeks to come, I would become numb to the horror of so many faces of missing loved ones posted on bus stops and hospitals. The checkpoints and barricades eventually disappeared. Even the seemingly never-ending columns of smoke rising from ground zero eventually were extinguished, but I would never be the same. New York would never be the same.
The pressing matters that drew me back early from my vacation in Greece, just the day before, no longer mattered so much.
On 9-11-01, I was walking to work at One Broadway, when the first plane hit the N. tower. A gaping hole opening up with leaping flames. Pedestrians with their faces and eyes locked on the catastrophe stood frozen, awestruck, but at that point we didn't know it was an intentional act of terrorism.
I proceeded to work, which was only a few blocks from the twin towers. As I neared One Broadway, a second commercial airliner blasted its way into the S. tower. Even though I was walking on the street several blocks away on the opposite side of a high rise, I sensed the blast, burning paperwork drifted down around me from the offices impacted by the exploding air-fuel mixture released by the disintegrating aircraft as it merged with the S. tower. A taxi stood motionless on Broadway. Its driver listening to the radio. When I asked what had happened, he explained that planes were crashing into tall buildings all over the city and at the Pentagon too. Although erroneous in the details, this report made clear that our nation was under attack.
I continued on my way. I took the elevator to my office on one of the top floors of One Broadway to collect some paperwork and to email friends and family that I was OK, because my cellphone wasn't working. Before I could click send, the first tower fell. A pyroclastic cloud of ash and dust entombed the financial district, turning day into night, made darker still by the immediate loss of electricity, phones, Internet and continued absence of cellphone signals. I stuffed my files in a red backpack that I normally used for law books; I was a full-time patent agent and legal intern, attending my last year of law school, at nights.
Proceeding to the nearest stairwell, I met a panicked administrative assistant, calmed her and helped her to evacuate the building, nine floors down a dark stairwell in an historic building considered to be one of New York's first skyscrapers. The lobby guard had closed the entrance, afraid to let anyone outside in or anyone inside out. Pieces of fluffy flotsam drifted in the smoke, dust and ash that had once been a clear, late-summer sky. After waiting too long without information, I convinced the guard to allow me to leave and to allow desperate tourists from the Ellis Island tour boats sanctuary in our lobby.
Two disoriented tourists decided to join me on my expedition northward, out of the financial district. The second tower came down before we made much progress, and a churning cloud of choking dust and ash advanced up one of the cavernous streets in our direction. My band took refuge in a bank lobby.
After some time huddled in our refuge, the density of the dust dissipated enough to continue the expedition northward. All were now covered in a fine gray dust in a surreal landscape. A makeshift first aid station passed out dust masks to passersby. A corner bodega passed out free bottled water. Nearing the Brooklyn Bridge, we finally emerged from the dust cloud, and, for the first time, I was stunned to see that the towers were no more.
After directing my companions toward the bridge to Brooklyn and safety, I turned westward toward my home in the West Village. It would take more than an hour navigating checkpoints and barricades before reaching my 350 square foot West Village apartment, where I could shower away the dust that covered me. Then, I went to the Internet cafe on Bleeker Street to finally let those concerned about me know that I was fine.
In the weeks to come, I would become numb to the horror of so many faces of missing loved ones posted on bus stops and hospitals. The checkpoints and barricades eventually disappeared. Even the seemingly never-ending columns of smoke rising from ground zero eventually were extinguished, but I would never be the same. New York would never be the same.
The pressing matters that drew me back early from my vacation in Greece, just the day before, no longer mattered so much.
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