President Obama flew into Arizona to announce his blueprint for a $75,000,000,000 mortgage bailout known as the “Homeowner Affordability and Stability Plan.”

REALonomics has digested the preliminary outline of this program which claims to “…offer assistance to as many as to 9 million homeowners…” through a combination of loan modifications and propping up of Fannie Mae and Freddie Mac, support for state housing authorities and financial incentives for lenders to re-tool existing loans for a predefined set of homeowners whose mortgages fall into specific qualifying categories.

How does it Work and who are the Beneficiaries?

Will the President’s plan make a difference and if so, to whom and when? And, is the plan a sound economic model that will actually help homeowners facing foreclosure, as claimed by the administration? Is this another step in the direction of creating a dependency upon the federal government for and on the part of some Americans and lending institutions?

Let’s take a look at the plan and ask some hard questions.

The plan, set to kick into gear on March 4, 2009, uses carefully calculated qualifying formulas based upon principal mortgage balance ceilings, rigid LTV ratios and market value reductions. The result is yes, some homeowners will be assisted. If you own property in California where 60% of the mortgages exceed $417,000, you will not qualify.

At this point, it looks as if those with higher end home values and jumbo or super jumbo loans are not going to be granted any relief. Only first position mortgages qualify. If you have a second, its only value is to help justify a reduction of the first based upon its contribution to your debt to income ratio.

DOWNLOAD THE EXAMPLE DOCUMENT HERE.

What’s the Financial Carrot for the Lenders?

The plan states that “Treasury will partner with the financial institutions to reduce homeowners’ monthly mortgage payments.” In effect, the taxpayer will be matching the reductions lenders approve on a “dollar-for-dollar” basis to a write down to a 31% debt-to-income ratio for borrowers and lenders will be required to keep the modifications in place for five years.

We will all be funding cash payments to the lenders to pull off the Obama plan. Lenders will receive up-front fees in the amount of $1,000 for each eligible modification. Lenders will also receive bonus payments monthly as long as the borrower stays current on the loan. Are you in favor of such support to lenders?

There’s more! Lenders will be given $1,500 for taking action with those homeowners who are NOT in default or behind in payments and an additional $500 for servicers for modification made while a borrower at risk of imminent default is still current. Is this something you like?

Still more! The government (taxpayers) will also pay up to $1,000 each year against principle balances on loans where the borrower is current on their mortgage payments. This takes place each year the borrower is current for up to 5 years. How does this sound to you?

Are we actually creating a new hybrid sub-prime mortgage product that is simply financed by taxpayers with newly printed money backed by loans from foreign banks?

DOWNLOAD THE PROGRAM FACT SHEET.

Are the Capital Market Supporting Obama’s Plan?

In short, the financial markets have already started to reject the plan with CitiGroup stock dropping to less than $2 and Bank of America plummeting on fears of nationalization of their enterprises and indeed the government control of the financial backbone of the American economy.

Since the federal government started tinkering with banks, throwing our TARP money, setting forth plans to retool mortgages and delivering so-called bailout plans, the stock market has plunged to pre 2002 levels with historic losses, indicating a continued lack of confidence on the part of investors in federal bailout programs.

Another interesting question those of us in the real estate industry should be asking is whether or not this plan will actually stop the reduction of home values, open the credit markets for new sales and stop foreclosures?

What would happen if we just left the market alone? We are already seeing banks stepping up to the plate to solve the problem without taxpayer support.

Do we want our industry’s future to be predicated on total control of the lending and qualifying process, government determination of property values and a segmentation of homeowners into various classes and categories based on home values? Or, do we have more confidence in the free market to work its way through this problem.

REALonomics believes we have only seen the beginning of the creation of a “Nanny State” that may result in more damage to the economy. To top it all off, the CEO of Bank of America has been subpoena in an attempt to force disclosure of bonuses paid to bank executives prior to BofA receiving TARP funds.

Are we thinking long term? Should we back off and let the markets self-correct? Are we willing to take on massive personal obligations for government backed mortgage solutions? How will the “Homeowner Affordability and Stability Plan” impact our children and grandchildren?

DOWNLOAD THE 14 QUESTION FAQ DOCUMENT.

Related posts:

1. The Federalization of our Financial System at your Expense
2. Home Price Declines Hit New Records: What Can the Industry Do?
3. Gekko was Wrong…Greed is Bad

This time around, however, NAR is getting it right and deserves the support of the industry…yes, I have already sent my letter to my elected officials supporting “The Four Point Plan” put forth by by NAR. REALonomics is endorsing this plan with comments inserted into NAR’s message that was emailed to members.

NAR has urged Congress to include the following provisions in any future legislation:

NAR POINT ONE: Make the $7500 tax credit available to all purchasers and eliminate the repayment requirement. The credit’s limited availability and required repayment terms have severely limited the credit’s appeal to potential homebuyers. As a result, the credit has not been widely used or proven effective at stimulating sales.

REALonomics: We concur. The tax credit should be a true credit against taxes, however, and at the descretioin of the buyer, be taken in one year or extended to up to three years of equal credit deduction. This would allow each consumer some flexibility in the application of the credit based upon income and other factors. In addition, we would like to see the deduction made available to investors who purchase in calendar year 2009.

NAR POINT TWO: Make the 2008 FHA, Fannie Mae and Freddie Mac loan limits permanent. New rules for 2009 would significantly reduce the FHA, Fannie Mae and Freddie Mac loan limit from their 2008 levels. Now is not the time to limit the availability of affordable mortgages.

REALonomics: This part of NAR’s plan needs further clarification for members. In general, we concur, but the devil could be lingering in the details on this one.

NAR POINT THREE: Get the Emergency Treasury bank relief program back on track by targeting more funds to mortgage relief efforts and increasing efforts to mitigate foreclosures. Don’t just give the banks unrestricted cash. Make the program work to improve mortgage and housing markets as it was originally intended.

REALonomics: Yes, NAR, this position is the correct one! We were all burned by the ambiguity of the emergency relief program and we, in fact, got hood-winked into believing that toxic mortgages were going to be purchased and sold to investors at discounts. In fact, the banks just banked (pun obvious) the bucks or, in some cases used the funds to purchase other banks. But the problem is also an empowered Treasury Secretary who could simply redirect the funds in just about any way he so desired. To date not a single mortgage has been purchased and resold. The mitigation of foreclosure loses is a tricky one and REALonomics takes a very conservative approach to how this should work. Consumers who are in default should not be rewarded without some additional tax incentives to those who are not in default. We cannot reward bad behavior. Leveling the playing field is going to require caution and discipline.

NAR POINT FOUR: Permanently bar banks and banking conglomerates from engaging in real estate brokerage and management. The banks have proven they have enough to do to simply properly manage their current lines of business. Do we really want them to manage the home buying process? Imagine what could have been the situation now if they already had the added ability to engage in real estate sales.

REALonomics: On this point REALonomics disagrees with NAR. Point four should not be on the table at this time. Although we are not yet convinced that we should advocate bank brokerage models, there remains a lot of room for discussion on how banks can collaborate in economic partnerships with real estate brokerage firms in order to shore-up the profitability of each to the benefit of the consumer. It’s understandable why NAR, as a preservation move, would call for this issue to be addressed and finalized. REALonomics still advocates streamlined and consumer-centric home buying/home financing models. Such models might be created out of financial partnerships that are carefully blueprinted so that banks and brokerage can maintain levels of expertise.

CLICK HERE to take action on the NAR Four Point Plan (NAR members only).

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The Obama news conference was followed this morning, Saturday, November 8, 2008 by a radio address with similar content. These two initial events give us hints about the Obama economic model that will shape America and of course, the real estate industry for perhaps decades.

Attacking the Economy Means Controlling the Outcome

The Obama team is going to attack the economy in laser-like fashion. New rules are going to be written that will impact the private sector and retool the way in which those transactions dependent upon credit and lending work.

REALonomics has believed for some time (years, actually) that the real estate industry needed to redefine itself through sweeping consumer-centric changes driven mostly by standards based brokerage and maximum transparency.

What we never knew and could never predict are the bleak economic factors that now give rise to the transformation of our business models and have fueled a meltdown of home values in such universal proportions. Principle: Economic problems left unsolved by the private sector typically invite government mandated intrusions in order to harness the favor of the electorate.

Can the RE Industry Still Write its Own Rules

It is beginning to look a lot like the real estate industry will be shaped not by factors we control but by the policies and rules created by others. We, under the mantle of the National Association of Realtors (NAR), have, for the most part, missed most of our opportunity to define and shape the debate and participate in the rules that will create a “New Real Estate Industry.” NAR’s mistaken endorsement of the $700 billion bailout program has hurt us and created a dependency relationship with the federal government. In essence, we have been placed in the unenviable position of a reactive industry rather than a proactive force.

Do we still have the clout and the courage to write our own rules? Do we have the will power, discipline, leadership and the creative inspiration to recognize that we are on the cusp of a “New Real Estate Economy” wherein we can control the rules that dictate how the industry operates within a consumer-centric era? Have we become an industry, like so many before us, that will eventually become reliant upon the solutions created by a bloated federal bureaucracy that is more interested in centralizing power than in actually empowering people?

The Key Principle behind Rule-Writing

It’s not so much the rules per se, that govern business matter as it is the economic and social viewpoints of those who pen the rules. It’s always belief that precedes policy. What we believe about our industry is different that what Washington believes. There are principles behind rule-writing, always!

The key principle behind rule-writing is simply “BE THE RULE WRITER.”

Here are but some of what REALonomics believes will be the “new rules” evolving from the financial policies that will be put in place during what will be increasingly defined by the new Administration as a “crisis.” A history lesson…bureaucracies flourish best when set in motion during “crisis.”

NEW RULE 1: There will be a heavy emphasis on creating a bevy of legislation designed to control each aspect of the mortgage lending process. This sounds good until we understand the difference between our and Washington’s definition of transparency and disclosure. The new set of rules will further slow the markets while everyone waits to see and then create a whole new layer of regulations and regulators operating in the basement of every mortgage lender.

NEW RULE 2: Crack down will be the new operative language for not only Wall Street and so-called “overpaid CEO’s” but also those within the real estate industry who are not fully compliant with Rule #1. REALonomics thinks that real estate brokers will become targets for industry crack down and the eventual police force for compliance with new lending and transaction rules. In his website Barack Obama has already pledge to crack down on brokers and lenders.

NEW RULE 3: NAR will become more and more dependent upon government approval for the implementation of our industry policies and procedures that have sustained us for decades. NAR, already reeling from the DOJ debacle, will have a mandated hotline to Washington and will need to use it to check-in, seek approval and help implement the new rules that will be written. In essence, NAR could become an extension and purveyor of brokerage and home ownership policies written by the Obama administration, Pelosi’s House and Reid’s Senate.

Although the housing industry is suffering and the real estate industry is under siege, REALonomics would like to encourage the industry to step up to the plate and position itself under a new set of operating principles that can be sent to Washington as a demonstration of our commitment to operating and policing our own industry. We are still strong enough to influence the outcomes if we are proactive rather than reactive.

Let’s continue to remind ourselves that the key principle behind rule-writing is simply “BE THE RULE WRITER.”

Get the full transcript of the Barack Obama news conference and read between the lines.

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It looks like Mr. Greenspan has finally started to step up to the plate with acknowledgements that his thinking was less that stellar.

Today, in a hearing before the House Oversight Committee Greenspan finally acknowledge, if only by innuendo, that his judgment fell short of what was needed to predict the housing market decline.

“Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment.

With respect to Greenspan’s belief that banks would act in the best interest of shareholders, Greenspan said his thinking was wrong because there was, “a flaw in the model that I perceived is the critical functioning structure that defines how the world works.” The current crisis was referred to by Greenspan in his opening statement: “We are in the midst of once-in-a-century credit tsunami.”

In essence Greenspan called this a “mistake” in how he viewed the integrity of banks and mortgage companies. Makes us wonder if he just fell off the turnip truck.

Of the current financial crisis, Greenspan said that it “turned out to be much broader than anything that I could have imagined.”

Unfortunately, Mr. Greenspan has not yet acknowledged his “mistake” in his endorsement of subprime lending as something good for consumers. Perhaps another day.

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According to a recent Standard&Poors/Case-Shiller home price index of the top twenty metropolitan area home values, we are seeing record declines. Get a copy of the report.

Here’s the breakdown synopsis (source: Standard&Poors/Case-Shiller) (arrow highlights by REALonomics):

In these and hundreds of other markets, home value declines are taking a toll on individuals and families whose financial security is predicated almost entirely on home ownership.

There are at least three things local real estate companies in partnership with mortgage and title service providers could do for struggling homeowners.

1. Set up financial support workshops led by experienced brokers/agents designed to coach homeowners with respect to their property values, the current trends, their specific mortgage situation and how to take positive steps to stay in their homes unless they absolutely must sell at this time. Such workshops should utilize skilled mortgage service counselors (not loan officers) who can give them answers;
2. Real estate agents in troubled markets should be literally returning to the old practice of knocking on doors, not to get listings but to meet homeowners as “Property Consultants” to discuss specific home values within their neighborhoods and offer advice. In addition, brokerage firms should deliver resource information to homeowners that will advise them about market conditions, refinancing and other information they need;
3. Brokerage firms should turn a portion of their print media budget and Internet costs toward creating blogs that are specifically administered by trained “Property Consultants” who can interact with property owners and deliver solid advice in real time.

During the next 24-36 months brokerage firms who want to build and retain consumer loyalty and predisposition should take a serious look at engaging in the creation of a group of “Property Consultants” who engage homeowners who are facing uncomfortable times.

Such an emphasis sends a powerful signal to consumers that we are serious, skilled, well trained, competent and knowledgeable professionals who can and will assist them with any property question they have, including financial counseling.

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Cast your confidential vote for President at iVoteAmerica.com.

—– syndicated post from iVoteAmerica begins here —–

Join the game that has taken America by surprise!

Previous big winners include Wall Street, the Mortgage industry and foreign investors including China and many others. Register today, login and play!

Everyone is automatically a contestant and the stakes have never been higher. Go ahead, put yourself on the line.

—– syndicated post from iVoteAmerica ends here —–

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There seem to be two camps developing within the real estate industry. The first camp believes the media and negative language is the culprit that is creating a lot of the market decline and lack of buyer confidence. The other camp is the group saying, “We need to look within the industry and raise our standards making them more consumer-centric and us less susceptible to repeating the errors of the past.” REALonomics falls into the later group.

As a result of feedback here is the comment from the Inman article posted here for our readership:

The notion that positive thinking and misplaced hype can move us away from a faulty and failing economic model is more dangerous than the crisis itself because it demonstrates the lack of depth in our thinking. This crisis cannot be repaired by “making people believe the worst is over…” This is the logical result and outcome of poor economic modeling in the mortgage industry that loaned billions to buyers who didn’t qualify and the real estate industry’s fickle pretense that it exercises ultimate fiduciary in its dealings with clients.

Rather than whining, what we should be doing as an industry is recreating ourselves in terms of standards-based brokerage practices, revamping our national and state networks into consumer-centric, transparent operations and utilizing the power of NAR to send a positive signal to consumers that we “get it” and that they are going to see a new side to the professional real estate industry they deserve and one that will refuse to close a transaction where the buyer does not qualify.

A standards-based model should include heavy fines for brokerage firms that (1) hire under qualified agents who lack the academic training and counseling skills we need for consumer protection; (2) refuse to fulfill maximum (not minimum) financial training in economics and real estate investments and fiduciary training courses and finally, (3) much higher costs to enter the industry and stay in it.

A standards-based industry would include national performance reviews and ratings of brokerage firms with financial and recognition incentives for creating and maintain standards of excellence that protect consumers and their investments in real estate.

In addition, we need to look at the role of NAR and how NAR services the industry and consider refocusing its mission and resources on a newly profiled industry that really understands and accepts responsibility for its actions when counseling consumers to invest in real estate.

One thing we believe with certainty, we are never returning to what we once knew. Having said that, what is it we would like to become as an industry after the dust settles?

While the Feds scramble to resolve issues, we should be scrambling as an industry to reinvent ourselves. Such a reinvention involves painful analysis and truth-telling about where we have been and how we have operated. Only then can we begin the process of rebuilding a tattered industry that is increasingly viewed with skepticism by most consumers.

REALonomics.net”

———- END OF COMMENT ———-

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REALonomics Editorial

We now own what we cannot control. We are witnessing the Federalizaiton of the Financial Systems of America. Backed by a fickle Congress and flanked by Federal Reserve Chairman Ben Bernanke, President Bush and Treasury Secretary Henry Paulson, contrary to their former political beliefs that government should stay out of the private sectors of the economy, took measures today to endorse the Federalization of our money systems.

Q1 - What does this mean to the real estate industry?

Clearly we are entering spooky waters wherein we dared never enter before. REALonomics believes the move by the government will paralyze the industry making home buying and selling incredibly difficult, if not impossible, in some already paralyzed markets. Home and commercial property values will assuredly decline even more, reducing the networth of the industry and its investor and home owner base.

Q2 - What does this mean to the mortgage industry?

Expect huge consolidations greater than the Bank of America’s absorbtion of Countrywide and Merrill Lynch. With this consolidation of the financial titans, mega titans will be created and essentially be required to submit to a new set of tightly regulated lending rules. It will be harder and harder to borrow and lend. This will create a over-regulation of the market and further drag on mortgage recovery.

Q3 - What does this mean to Americans?

Each of the more than 300 million people in America, including those born yesterday, will end up with at least a $100,000 debt hanging over their heads. This is the representative figure that is the accumulation of the current escalation of the national deficit and the new estimated $2 trillion dollar bailout of the financial markets.

The government bailout of the private sector of the market means that each of us was just handed a tax bill or, we might call it a “cash call” because we are collectively the new owners of the private problems of borrows and lenders.

Ron Paul (R, TX) was correct when he told Ben Bernanke, in essence, “you are going to bankrupt the American people with your money policies.”

The average American family is essentially, on paper, wiped out by this move and the impact on the real estate and mortgage industries was just extended to perhap a decade or even more.

Q4 - What does this mean in terms of the election?

This is the easy question and the answer is more finger pointing, more investigations, excessive government snooping (there needs to be some), lots of drama on the political stump and a great deal of harm to John McCain, who is already having difficulty coming out from the shadow of Bush’s foreign and domestic policies.

But it also means trouble for Barack Obama. He can forget about his national health care program for all Americans, he can forget about taxing anyone, much less those earning incomes above $250k and he can kiss his “no-new-energy-if-it-means-drilling-coal fired plants-and-nuclear-power” policy good by.

In essence the damage done to both candidacies is substantial and the next 45 days are going to be like the wild-wild-west as we run up to election time. To vote in the Presidential poll, visit www.iVoteAmerica.com.

The most remarkable thing about today’s move to “take-over” is that it represents a profoundly fundamental shift in our capital market value system and establishes a whole new mechanism for creating a way to further tax the American people. Make no mistake about it, you just got taxed and to pay the tax bill you were forced to financed the payments over time. There was paperwork, no disclosure and no recource for any of us. All of this is taking place right before our eyes without much of a whimper or a voice of protest.

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EDITORIAL

A re-post from iVoteAmerica, dated Monday, September 15, 2008.

In the movie Wall Street, Gordon Gekko proclaimed to shareholders, “Greed is good!” Gordon was wrong. Wall Street was wrong. The real estate and mortgage industries were wrong.

Oh, by the way…Alan Greenspan was wrong too when he proclaimed that subprime lending was “innovative” and “beneficial to consumers.”

Sound economics and the art of lending are predicated upon the borrower’s capacity to service the debt, pay it down over time and deliver return to the lender.

The concept of borrowing without capacity is foreign to all western economies and you won’t find it on any campus in America in Economics 101. Neither you nor many of your friends was ever taught the principle “you can have something for nothing.”

No One Whined about the Flow of Money

From about 2000 through 2005 greed was good to Wall Street and to the real estate and to the mortgage industries. No one whined about the money back then.

Even REALonomics, one the real estate industry’s few cutting-edge, truth-telling blogs has acknowledged in a recent post the roll the real estate and mortgage industries have played in the crash of the housing market. Refreshing honesty amidst a sea of excessive finger-pointing and blame gaming.

With today’s huge 500 point decline in the NYSE, the collapse of Lehman Brothers and the timely absorption of Merrill Lynch by Bank of America we have the first bright light in the housing market collapse.

The First True Glimpse of Light

Today’s calamity was a glimmer of light and good news. Today’s plummet was the true market telling us greed is bad.

Yes, this is a bright light! Finally, the healing can begin along with celebration of the release of the last hot air from a pumped-up pseudo market, held together by slick accounting practices.

If not next year then certainly the year after your home value will begin to increase again.

Politically, this means there is less chance the Federal Government will continue its bailout of collapsing institutions that have made greed their mantra.

Tomorrow may see an uptick in the market as the true, blue-blooded economists and investors who understand the balance between eithical lending and moral borrowing begin to buy into a new market that is finally vomiting the economic bacteria from the depths of its belly.

Let the healing begin!

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Can the 2008 Housing Act Stabilize and Turn the Real Estate Cycle Around?

Who would have only 5 years ago expected that we would be staring down such complex and turbulent times in real estate?

Last week, President George Bush signed The American Housing Rescue and Foreclosure Prevention Act of 2008 (the Housing Act) into law. It is the most sweeping housing legislation since the Great Depression. The new Act authorizes the Department of the Treasury to stem the tide of home foreclosures and provide a lifeline to mortgage lenders. With inventory in many large cities sitting at almost a one year level, and foreclosures expected to surpass 6 million by 2012, they have a huge task ahead.

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