REO-Mortgage Swaps

www.DebtRecoveryInitiative.org

The Lateral Mortgage Swap
(A Rational Plan for Resuscitating the Housing Market)
(opinion/commentary)

REOs are bank-owned properties which have been vacated, and are either being held in anticipation of sale, or have been sold, usually at significant losses, and usually in large lots of several thousand. This proposal seeks to utilize that inventory of already foreclosed and vacated properties, to restart the housing market by facilitating a swap between the owners of homes who face foreclosure now, and private investors willing to purchase distressed mortgages at a discount:

The fundamental problem with helping out mortgage holders who are at risk of losing their homes is that a) in many cases, they are partially to blame for attempting to buy a house they couldn't afford in the first place, and b) even if the mortgages are adjusted down sufficiently to help these people, in many cases there's a real risk that they'll be in trouble again within 6-12 months anyway.

There are some substantial portfolios of REOs which are sitting out there in limbo, waiting to see what the government is going to do. These properties tend to trade in the $.38 to $.46 per dollar range, relative to the last appraisal at the time of sale. Since many of these have already been sold to private investors, the banks have already recognized their losses.

I am assuming the number of at risk mortgages is currently in excess of 2-million. The cost of a foreclosure is exacerbated by several factors, among them legal delays caused by attorneys who protract the process trying to negotiate adjustments, and damage to the property by the foreclosed owners on the way out if it comes to that. So there's a measurable value to putting in place a plan that quickly ascertains the prospect of staying in the home, and then motivating those that can't to take benign action right away.

This constitutes a "kinder, gentler" foreclosure concept:

Don't put people out of their homes and on to the street,
move them into something they can afford.

1. The Treasury acquires a substantial inventory of REOs by buying up those which are in limbo currently at a price which gives the speculators some modest profit, but keeps the government's cost reasonably close to that $.42 range. These properties go into a database which is available to people who (after taking a standard credit inventory) are deemed unlikely to be able to remain in their current home. (This also allows the government to set stricter credit requirements, since they are offering those that don't qualify an alternative.)

They are given an option to vacate their current home in good condition, and move into a home they select (on-line) presumably in the same general geographic area. The government retains ownership of the house, and the new occupants get a 12-month rent-to-own contract, during which time they can attempt to purchase the house (at some reasonable premium over it's original fire sale price) by getting their own financing, or sell the house themselves at their option price. Either way, the government gets it's money back and makes money on the deal (assuming they stay in the home). It also gives them an incentive to improve the property while they're living there.

2. The home they move out of is offered for sale to medium size investors who must pay all-cash and buy a minimum of let's say $1-million(?) in valuation (perhaps 2 or 3 properties at a time). The investors get the homes at a 'bargain' price, but the government retains an interest in the house subject to certain conditions the investor must meet in terms of marketing it. This mobilizes private capital as part of the 'stimulus'.

The government issues something like the 'Net Worth Certificate' to the bank, an instrument which the government guarantees to have a value sufficient to enable the banks to meet their capital reserves obligations, in return for the mortgage, and the amount of money the bank ultimately gets depends on how well the investor does at marketing the house on the open market. The program could be setup such that the investors get certain tax advantages the sooner they are able to sell the vacated property.

The rationale here is due in part to the fact that there are many small investors who know real-estate and would like to get their hands on some of these homes at big discounts, but can't afford to buy large numbers of them. Second, one of the problems with marketing these large 'baskets' of properties is that it's very costly to appraise their real value. If the program is setup such that local investors can actually go out and walk properties in their area, people who know their local markets etc., the on-line auction will provide a more competitive and accurate market value.

Using a 'Net Worth Certificate', we protect the bank's minimum capital requirements for a period of time so that a more legitimate market may be found for the properties in question. It seems like a good way to keep them in business, and soften the blow of an outright foreclosure by putting in place a process that gives each property a much better chance of being sold at a more realistic price as the overall housing market improves.

The other big advantage is that it provides an alternative to simply putting people out in the street who simply cannot afford the house they originally bought. As I understand it, the current plan is for the government to force banks to re-negotiate mortgages in order to solve the political problem that all these foreclosures are creating. This way, they're still being forced to accept losses, but it's not done all at once, and gives them options quite a bit better than the worst case scenario.

Finally, by putting this whole system on-line (with the US Treasury running the database, and the credit checking and the bidding process), the properties in question would all be presented in a uniform fashion, with photos, spec sheets, etc. People who know they can't stay where they are could go on-line and pick something out, and since it would be a first-come first-served deal, it would motivate them to move quickly. Likewise, prospective investors in vacated houses could get in the game (so to speak) simply by registering and posting a letter of credit along with some cash.

If You Care, Take Action!
If you believe these ideas may contribute to the national discussion of this issue, I strongly urge you to pass this along to anyone you know who might also find it useful. Even better, call your Senators and Representatives in Congress.

Their phone numbers may be found here: Senators / Representatives

Each member of Congress has staff assigned to take your calls. They are usually very courteous and will listen to what you have to say. Tell them what you believe the Congress should be doing. Your effort to contact them sends a powerful message that you care about this issue.

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