Derivative…Toxic Asset…How about Common Sense

 

This is my only understanding of a Toxic Asset.

     When I was a younger man, we would purchase toxic assets and spread them across the newly turned soil in our garden. If all went well, by summer’s end we had tomatoes, peppers, parsley, etc. Fertilizer was a toxic asset. If it was used correctly, it aided the effort of growing a garden.

Time has passed. Now fertilizer has become a component of weapons of mass destruction and toxic assets have become a fancy label on financial balance sheets. The recovery of the housing industry is tied to resolving the issue of toxic assets.

 

2009 version of a toxic asset is tied to this weapon of mass economic destruction!

     I don’t possess to have the higher education that would allow me to explain, much less understand, derivatives. I don’t pretend to know the ins and outs of bundling. Those terms and phrases are beyond most Americans.

     I do know that people in towns from east to west understand empty houses. I do know that neighborhoods from north to south understand empty houses. I know that people in every corner of the United States understand the impact of empty houses. It would seem to me, that the cure of the problem exits on lots of Main Streets and not many Wall Streets.

This should not be the primer for any Stimulus Plan in the housing market.

     I have an idea. What if the Federal Government actually set out to fix a price on the “toxic assets”? It can be easily done. Sell the houses! Rather than some obtuse partnership with assorted well heeled investors, why not sell the houses and put the brakes on the declining markets? Don’t be fooled by for sales signs that exist today. The market is under a stranglehold regarding credit and lending. The FHA and Fannie and Freddie and Morty can all proclaim that they are pouring money into the economy. It is not reaching the street.

     Guidelines for lending that appear relaxed are quietly made more stringent behind the scenes by the use of internal guidelines at lenders called “overlays”. The easy explanation of the overlay is that published guidelines may state a borrower needs a 680 credit score but the lender has an overlay that says they need a score of 720. Money is frozen.

     It is a damn shell game.

     If you want to get the housing market jump started, how about trying this on for size.

1. Attach a credit to every home that has been foreclosed on equal to 3.5% of the purchase price (when sold).
2. Direct that the credit is only viable when used in conjunction with a FHA loan to purchase the property.
3. Direct that the credit can be redeemed by the lender that makes the FHA loan on the property in lieu of the required 3.5% down payment needed on the FHA loan.
4. Direct that the buyer of the property sign a lien to the Federal Government for the 3.5% credit to be paid back when the home is sold.
5. Direct that in order to participate in the program the home must be a primary residence and can not be sold for 5 years.

     Voila, prices for the homes that prop up the toxic assets are set when a sale is made. Loans can begin to be made and those qualified to borrow but are lacking the sufficient down payment can purchase these homes. Neighborhoods will begin to have neighbors again. New homeowners will stimulate all the ancillary services and the economy will begin to grow.

     The other factor causing problems are all the loans that are in between bad and toast. There are programs to deal with part of the problem. The final solution will have to remove the cloud that hangs over “short sales.”  This is another area that now features snake oil salesman and bill collectors gone wild.

This is not the man you want resolving your housing dilemma.

     Again, there are steps that need to be taken.

1. If you are a homeowner and wish to avoid tax consequences on the amount of money forgiven on the transaction, you will be required to assign a limited power of attorney (limited to the sale of the home) to the holder of your first trust.
2. The holder of the first trust will have to negotiate a listing with a licensed broker.
3. The holder of the first trust will be required to complete the sale in good faith.
4. The holder of all trusts will be allotted a portion of the sale proceeds equal to the percentage of the outstanding debt. (If the loan in default was a 80-15-5, the proceeds of the sale will be distributed 80%-15%-5%)
5. The Federal Government will ameliorate the loss using a formula of 40% of the loss will be reimbursed to the lien holders using the same percentage of exposure displayed in item 4.
6. The cost of sale will be paid out of the proceeds of the sale before any monies are distributed to the lien holders.
7. Standard costs of sale will be reduced by 20% in an effort to ensure that the cost of the program is fairly shared.
8. Any  third party vendor (Mortgage Company, Mortgage Broker, Appraisor, Realtor, Title Company, Title Insurance Company, Real Estate Attorney, Bank, etc.) that refuses to take part in the program shall be prohibited from partaking in any other real estate transaction involving FHA, HUD, Fannie Mae or Freddie Mac or any other Federal Government entity.

     There you have it. No magic. No shifting shell game. This is just common sense.

Can I just call it my “two cents worth” on the topic?

If you want the housing market to move, you need to address the housing market. If you would like to read about some other solutions….click HERE and check out Realty.com