Dear PBO #4 – A Fix for Real Estate

Below is my letter to the President regarding the economy; it is in summary form.  To see full details click the Dear PBO page and go to the July 15 letter.

Dear Mr. President

 Real estate is by far one of the largest assets a family will have and for many it’s a piece, if not the biggest piece, or their net worth.  The stupidly of lenders to loan money to people who could not afford the homes they purchased have hurt all of us including many of the original borrowers who purchased a home they thought they could never get in their lives.  Even more sinister is the pain caused to current homeowners whose values have been decimated and whose net worth has sharply been reduced; through no fault of theirs.

 The folks that should not have gotten a mortgage, likely signed documents they did not even understand or even read.  And if represented by an attorney they may have heard the lawyer, but did not listen since the bank placed before them the “dream of a lifetime”.  In fact I would suggest most of the closing officers or mortgage bankers were and still are unable to understand and explain the loan documents.  Greed on all sides has a funny way of doing that.

 Since many of the owners mentioned in the preceding paragraph now have homes in foreclosure, the inventory of homes has gone up, the value of homes has plummeted and confidence in real estate, the bedrock of many personal balance sheets is gone.  And along with it, consumer confidence and consumer spending.  Couple with this the “cost” of the foreclosures, and the family “cost” of losing a home and financial hardship sometimes leading to splitting families and this situation is even more magnified.

 So let’s add up the costs of the real estate mess:

 To the banks: Loan write-offs, foreclosure costs, loss in shareholder value, fewer new loans due to tightened credit standards

 To Families: Loss of a home or loss of a significant amount of value and net worth, lack of confidence to make home improvements, lack of confidence to spend money, family stress

 To Local communities: Loss of value due to high supply, disrupted neighborhoods, loss of property taxes for schools, lower tax levy approval due to the economic fears everyone feels, in some case vacant homes resulting in vandalism and crime.

 To the building trades: Loss of jobs, loss of businesses and loss of hope for the near future.

 These are the kinds of costs that last for years.  Our economy cannot sustain these kinds of costs for years nor the resulting ramifications most notably lower consumer confidence.  Also no real economic recovery was either initiated or maintained without a healthy, or at least an improving, real estate market.

 The answer: Slow or reverse foreclosures, encourage bankers to lend on new real estate and require bankers to “take back” foreclosed real estate. 

 This of course will need significant and substantial changes in current regulations and/or laws.   Currently banks cannot keep non performing loans on their books.  But since many of the larger banks and mortgage brokers created this situation, requiring them, or at least “encouraging” them to keep these loans will help all.

 How to make this work?  Each bank sets up a subsidiary that holds these nonperforming loans and the underlying homes.  Foreclosed homes are then set up with a lease to the existing family also containing an option to buy.  In essence banks would now have real estate management companies.  We have to do something untraditional to address this untraditional condition.

 Benefits?  Families stay in their homes and STAY families.  Home values stop their horrific free fall.  Local governmental units work on other more productive matters.  Taxes related to property prices (mostly funding education) begin to stabilize.  Builders and contractors have work again with someone who can pay.  Bankers, who are really bad at selling collateral, and taking huge losses while doing so, can take on a new business, albeit reluctantly, much as they did with insurance, underwriting, stock and bond brokerage, etc. 

 This is not a government bail out.  It is though, a government mandate.  Critics would say this is not the free market working. But in the future as we will analyze the entire events before, during and after this real estate debacle we will find very little true market forces were in place.  What was in place were the free market curses of greed, ignorance and possibly deception.

 Thanks for the listen – until next time.


 Thomas K Sheehan

Sheehan Financial Group

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