Democracy for New Mexico: NM-Sen: Meet Tom Udall, Jill Cooper Udall & Martha Burk at Launch of Women for Udall

« Obama to Air New Spanish Language Radio Ad in NM, 3 Other States | Main | (Updated) Livestream of Obama's Speech in Berlin at 11 AM MDT »

Wednesday, July 23, 2008

NM-Sen: Meet Tom Udall, Jill Cooper Udall & Martha Burk at Launch of Women for Udall

Congressman Tom Udall
and
Jill Cooper Udall
Invite you to attend the roll out of
Women for Udall
with special guest
Martha Burk
In support of Tom Udall, Candidate for U.S. Senate

Thursday August 7th, 10:00 AM
UNM Law School Room 2402
1117 Stanford NE, Albuquerque

For more information or to RSVP please contact Sarah Cobb at 505.884.3055 or by email: scobb@tomudall.com. Click for FLYER (pdf). Pass it on.

July 23, 2008 at 07:33 PM in 2008 NM Senate Race | Permalink

Comments

Message for Jill Cooper Udall and Tom Udall:

Background of author:
My name is Phillip Duncan. I am a semi-retired commercial banker with 35 years’ experience making loans to small businesses and consumers. I obtained my MBA from Northwestern University’s Kellogg Graduate School of Management in 1979. I now live with my wife here in New Mexico, where we both teach for online colleges as I continue my small bank consulting business.

HOW THE BAILOUT CAN BE FOR MAIN STREET:
It pains me to hear so many of our representatives in the House say that “the American people don’t need another $700 Billion in debt” or “why should we bail out Wall Street while forgetting about Main Street” when they tried to justify voting down the mortgage industry bailout today. Such comments make it obvious that these lawmakers either have no understanding of what was proposed or are more concerned about making political points than about facing this issue squarely and dealing with it. This proposal is not for more debt to pay for pork barrel spending, the Iraq war, or even humanitarian aid. Instead, the “bailout” is an opportunity to show faith in your constituents by investing in the American economy. The “toxic assets” that politicians and pundits are commenting on are actually packages of loans secured by one of the most stable assets available in the world – U. S. homes. While it is certainly true that home values have declined by 20 – 30% or more in recent months, the open marketplace has required discounts of as much as 80% to take these home mortgage backed securities off the hands of financial institutions desperate for cash. Does anyone truly believe that our residential real estate market has declined by that much? Of course not. After all, even in the Great Depression, home values only declined by 30% nationwide.
So, why can’t these assets be sold for closer to the underlying value of the homes backing them? Well, in a word, FEAR. With liquidity of banks being pressured, with the uncertainty of just how far home values might decline, and with a very limited number of investors like Warren Buffet even willing to consider investing in these securities, buyers have been afforded the opportunity to almost name their own price. If that price is 20 cents on the dollar and home values decline by even as much as 50 cents on the dollar from their peaks, once the market rights itself, (which it will), these buyers will stand to make a 150% return on their investment. All they would have to do is foreclose on the borrowers and sell the homes. Why not let the American people take some of that profit and help save many of the struggling homeowners in the bargain? We can and must do both.
This is not $700 billion being spent, never to be seen again. It is an investment by America in two pillars of our economy – our home values and our people’s ability to earn the incomes necessary to pay for their reasonable housing costs. If they cannot afford to pay the mortgages they currently owe, we need to determine what they can pay and adjust the loan installments accordingly. The traditional bank practice of foreclosing on borrowers who are three payments past due may have worked fine in a relatively stable market, when such occurrences were rare and the supply of homes was relatively in balance with the demand for them. But now, with so many loans having been made under terms that hapless borrowers will never be able to meet, when the market is already flooded with unsold homes, when home mortgage lenders are tightening their standards, and when the pool of potential buyers is shrinking by the day, this orderly process has turned into a fire sale. No one is served by lenders foreclosing on these homes, placing them on the market with millions of other unsold homes, and selling them at increasingly distressed prices. No one that is, except the speculative buyers who understand that the markets will eventually return to balance and home values will stabilize. And when that happens, these buyers will stand to make triple digit profits.
We need to find a way to keep these distressed borrowers in their homes and paying something on their mortgages. Once a borrower knows they are going to lose their home, they not only stop paying their home loans, they stop paying real estate taxes, and they stop caring for or even caring about the homes they are about to lose. Unoccupied housing that has not been properly maintained looses value rapidly. Foreclosures add to the unsold housing glut, further depressing prices, further accelerating the crisis.
So, how can we keep people in their homes?
Many borrowers cannot afford to pay adjustable mortgages at 9% or 10%, but they may well be able to pay at a rate of 4% or 5%. This is evidenced by the fact that many of these loans were being paid on time until the interest rates reset after the “teaser rate” period expired. Perhaps the payments started out at 4%, but then increased after a year to 10%. On a $100,000 loan, this would result in increased payments from $634 per month to $870 per month – a 37% increase.
Unfortunately, the financial services industry deluded itself and investors by underwriting these loans as if the 4% teaser rate would go on forever. Under conventional underwriting standards, lenders limit borrowers “housing ratio,” (the amount of monthly payments for mortgage, real estate taxes and homeowner’s insurance) to about 30% of a household’s gross monthly income. Ignoring the taxes and insurance for simplicity, that means a family earning as little as $2,115 per month could afford the $634 monthly loan payment. But, when the teaser rate ends and payments jump to $870 per month, the family’s “housing ratio” rises from 30% to 41%, well above the norm for “affordability.” It’s not surprising that so many defaults occur soon after the teaser rate expires and monthly payments skyrocket. We need to seriously consider adjusting payments back to levels that the borrowers can truly afford.
If we do adjust payments, what happens to the value of the loan to the investors who hold it? It doesn’t decrease as much as you might expect. If the market normally requires a 10% return on properly paying home mortgages, the discount required to sell a mortgage paying just 4% is “only” about $27,000. So, the holder of the mortgage would have to accept $73,000 for a loan it originally invested $100,000 in. But, that’s a significantly better deal than the $50,000 or even larger discount the market is currently able to squeeze out of distressed financial institutions and investors.
Taking this argument back to the mind boggling scale of the proposed bailout, an investor (the federal government) could purchase these mortgages at a higher price than any other investor would currently offer in exchange for stock warrants or other means of sharing in the selling financial institutions’ future success and still come out “whole.” Paying 73 cents on the dollar for these loans would permit the government to reduce rates on the entire $700 billion package of loans by more than half, and still get our entire investment back, before even considering any value that the warrants might generate down the road.
Of course, not all of these loans can or should be adjusted, and not all of them will repay, even at reduced rates. Some loans will still default. Thousands of loans were made to individual investors who bought homes not to live in but to speculate that rising prices would continue rising – at least long enough for them to sell out at a profit. These aggressive (some might say “greedy”) investors should suffer just as any investor does when their bets go wrong. If they can’t afford to carry the payments owed on their bad investments, they should be foreclosed upon. Other loans made on owner occupied properties will default no matter what the interest rate is, due to job losses or other personal financial setbacks. So, some foreclosures will still result. But, they will be spaced out over time and the resulting foreclosure sales will still yield a price that will most likely be close to, if not greater than, the 73 cents on the dollar our government paid for them. Thus, if the government buys these assets at such a discount, it is very possible, even likely, that the federal government will actually make a profit on the “bail out.”
Another Alternative:
If, instead of purchasing these loans, the federal government agreed to guarantee their repayment at, say again, 73 cents on the dollar, a floor value of the loans would be established. The model of the Small Business Administration operates in just such a fashion. The SBA, a federal agency, guarantees banks that up to 90% of their qualifying original loan amount will be repaid. If an SBA guaranteed loan defaults, the SBA will either take over the loan and pay the originating bank 90% of the loan balance or it will instruct the bank to sell the business assets, and reimburses the bank for up to 90% of the net loss after the business assets are sold. The SBA gets an up-front fee of about 1 – 2% of the loan amount in exchange for its guarantee.
Applying the SBA guaranty model to the home mortgage crisis would defer and/or eliminate the need to spend actual dollars to rescue these assets, since the guaranty only would come into play when and if a loss actually occurred. In the meantime, lender portfolios would now have a minimum value that is backed by the full faith and credit of the U.S. government. That would make them suddenly desirable and therefore saleable assets. Lenders could sell them or borrow against them readily. This would prime the pump for building the liquidity that the financial industry so desperately needs, without having to raise $700 billion immediately, if ever.
While this guarantee option would indeed avoid immediate government borrowing, it would be more difficult to dictate the restructuring of badly structured home loans if the federal government doesn’t actually own them. It may be possible to require lenders to lower rates and restructure payments in exchange for these guarantees, but it is hard to predict how such an arrangement might work and still be acceptable to all parties. Nevertheless, it is an option worth considering.
Whether by outright purchase, by guarantees, or by some combination, we must all agree that there are certain times when the government needs to be the “lender of last resort.” This is definitely one of them. It is we, the people, who need “bailing out.” If the government does not act decisively and quickly, we will all suffer. We will suffer whether or not we had anything to do with the greed, fraud, and mismanagement that got us here. We will suffer merely because we own homes, have retirement accounts, or work for businesses that will shrink or fade out of existence due to this crisis.
Respectfully but urgently,