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Thinking about the current real estate crisis -- what's being done, what's not, and maybe what should be

By Andrew Pollack on 09/19/2008 at 11:21 PM EDT

As a result of the most recent abuse of good sense and lack of feduciary responsibilty, a lot of banks and a investment houses are stuck with a lot of houses that aren't worth the money they've loaned out on them. The problem then, is that the houses aren't good investments for the short term. We also have a need for housing for many people -- good people. It seems to me that what's missing is two things, not one. The first one is being tackled by the Fed -- spreading enough money into the credit system that these banks can keep operating while the underlying problem is fixed. The second one isn't being fixed. Everyone is classing these loans as total write offs.

The banks need to create a new kind of mortgage. Think of it like an extended sale. Say you, the bank, are invested in a house at 300,000 dollars. With the market dip, its only worth 250,000. You find the right buyer, and you make the deal something like this: Sell it for 225,000 and agree that when it is re-sold or refinanced -- or in 10 years, any difference in value over 250,000 is split 50% back to the back. The bank is betting on the long term real estate market so its a long term win. The homeowner gets an otherwise unaffordable home.

In the end, NOTHING has been better for the US Economy than home ownership. We can criticize details of how the banking system has gotten us here, but that same system is responsible for the the most successful economy ever -- one in which almost anyone can end up a home owner. A very strong case can be made that the huge successes we've had for the last forty years can be tied very closely to Freddie Mac and Fannie Mae making home ownership more possible for so many people. Nowhere in the world is that as attainable. If in the end it cost us some tax money to make that system healthy again, it may just be the best investment of our taxes we have ever made. It sure beats 700 mile fences, or thousands of bombs dropped out of airplanes.

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re: Thinking about the current real estate crisis -- what's being done, what's not, and maybe what should beBy Tim Lorge on 09/20/2008 at 12:28 AM EDT
We have something like that. It is called the Farmer's Home Loan. The
difference is there is a certain period of time that the owner can't sell. If
they do, any and all appreciation goes back to the agency. It is very,
difficult to find properties that can be sold this way and people who want to
sell this way.

Back when I sold real estate, circa late 80's early 90's, these deals took
close to two years to close and required tons and tons of paperwork. Who wants
to do that especially when you have a hot real estate market? They were a
nightmare for everyone except the buyer... unless you wanted to move before you
could. The problem it creates for the buyer is a lack of equity for purchase of
a new home when they are ready.

There are a couple of things you need to remember.

1. Everything in the economy is cyclical. Things will change soon enough.

2. The current "real estate crisis" only effects 1 to 2% of ALL home owners.
Mind you, these are people who shouldn't have had a mortgage to begin with
because they wouldn't have qualified under normal financing.

3. Never, EVER think government is the solution. It always is and always will
be the problem. Remember, these are the same people who run the DMV and "Family
Services". Do you really want them in your house?
You had me nodding along with your for a bit, then you lost me totally.By Andrew Pollack on 09/21/2008 at 10:23 PM EDT
A Farmer's loan is a close pattern. Essentially, you're encumbering the
property. Around here, there are some farms that can make an agreement that
removes their right to subdivide or build commercial buildings. That allows
them to lower the assessed value of the property and thus afford the taxes.
Should the property later resell and those conditions change, the back taxes
become due at the time of the sale. This would be a similar idea.

As far as government never being the solution - that's too simplistic and is
every bit as unthinkingly idealistic as the most green teen-aged liberal.
There are some things for which government is the only possible realistic
answer. In this case, you have a lot of paper that is a very poor short term
investment, but in the long run much of the value can be recouped. The ability
to hold such a vast amount of money for long enough to resolve the issues is
something only government is suited to do.

The present trouble we're in comes from a lack of governmental oversight and an
unregulated capitalism that lived up to the worst expectations of Karl Marx.

Government allows humans to live together in societies larger than a local
tribe in which everyone knows everyone else.

If you've got a home, thank your system of government (which, by the way,
yourself -- with all the other selves out there).
re: Thinking about the current real estate crisis -- what's being done, what's not, and maybe what should beBy axel on 09/20/2008 at 09:34 AM EDT
Not sure if its related to your post, but in relationship to the current
nightmare of the global financial system the real estate crisis has been the
starting point not the underlying reason. With those levels of lack of risk
assessment, there could have been other starting points, I guess.
Anyway I second your idea.
I am no expert, but as I understand the current US-politics in that areas, they
are primarily preventing the banks from crashing and don't care much about the
home owners. Agents of the bank took the decision that the buyer it
creditworthy, which obviously has been wrong. So why not force them to stay
invested and and give them a good learning incentive to better their risk
assessment next time?

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