by Joe Shea
June 1, 2011
HOW TO SAVE AMERICA'S DISTRESSED HOMES
BRADENTON, June 1, 2011 -- Deep in a funk last night about the future impacts of falling property tax revenues on our cities and schools, the terrible burden of mortgages on the unemployed and poorly-paid Americans who are losing their homes, and I think the grace of God, I've come up with a plan that can help Americans save their homes, banks ensure their own future, and the economy begin to steadily recover.
The Closed Housing Pool I came up with is fairly simple; I think every one of our readers can understand it. If you wonder whether banks would fiorgive loans, read how Bank of America is actually giving homes away. The Closed Housing Plan would allow them to do the same tyhing while also generating a long-term revenue stream for themselves and a future bond principal payment for homeowners.
In the Closed Housing Pool, a group of property owners pool the titles to their vacant, abandoned, foreclosed, "underwater" or otherwise distressed homes, get those properties appraised, have their mortgages forgiven by the mortgage-holder, jointly get a 30-year fixed-rate loan for the full appraised value of the properties, and purchase tax-free municipal bonds with the loan, pledging all the income from the bond to the mortgage holder until the principal and interest of the loan is fully repaid, when the group would then divide the face value of the bond.
No fees or other payments may be made or incurred by the pool. Title to the homes would be returned immediately upon purchase of the bond.
Anyone who disagrees with the appraisal of their home will produce new appraisals at their own expense made by two appraisers, and accept either the median value of those two appraisers or an independent appraisal by the bank, or the median value of those two appraisals, if the bank agrees. A homeowner who continues to disagree about his appraisal should not be permitted to join the pool. Upon maturity, and when the full amount of the loan is repaid, the shareholders will divide the bond's principal - tax-exmpt because there's no gain - among themselves, and the pool will be dissolved.
For example, if 12 homes in middle-income Bayshore Gardens here participated, each valued at about $100,000, the bank(s) would forgive and write off the outstanding balance of their mortgages, and make a loan at a 6% fixed rate to the pool of $1,200,000 - the full appraised value of the home - in return for the pledge of tax-exempt revenues from a municiplal bond such as those of the Bradenton, Fla., Downtown Development Authority, paying 5.5% per year, or $66,000, a year.
That annual payment of $66,000 would leave a debt-service shortfall of approximately $20,400 per year, or $1,700 per month, so $141 per month will be payable by each of the pool shareholders, their heirs and assignees for the life of the loan.
That would be their new "mortgage." After 30 years, the bank will have received a total of $2,592,000 in payments from the bond proceeds, and the pool's shareholders will have a tax-exempt $1,200,000 to divide.
In real life, of course, the value of the homes would serve as each homeowner's pro rata share of the bond. There would probably be several banks involved, unless the bank proposed the idea to its mortage clients, or the pool members sought out owners who have all borrowed from the same bank. It would take cooperation, patience and leadership, but cost no one very much at all.
A slightly lower loan rate (5.5 percent is more common now) or a little higher bond yield, or both, might eliminate all payments by members of the pool. A higher interest rate and a lower bond yield, or both, could increase payments. The numbers I've used for both the loan and bond in the example below are real, current rates.
Under the Closed Housing Pool, the homeowners retain title to their homes and are responsible individually for all other expenses of the home. They may keep, rent, bequeath or sell it. In any event, their cost of homeownership in my example would be reduced to $141 per month instead of the large mortgage payments they currently owe and frequently cannot pay. In many cases, they would have no payments. The share of the eventual principal payment received by the shareholders would be determined solely by the original agreed appraised value of their home.
The Closed Housing Pool should have only three functions after assembling its members and purchasing the bond. First, it should repay the bank monthly from the bond proceeds; second, it should enforce and monitor the payment of any shortfall payments due to the bank from shareholders, according to rules set forth elsewhere; and upon maturity of the bond, divide the $1,200,000 principal, after any expenses, among the shareholders. At that time, the bank will have received a total of $2,592,000 in payments from the bond proceeds. The home owners or their heirs will receive $100,000 each.
The central transaction would look like this: The pool representative will have gathered all the titles of the shareholders and symbolically place them on the lender's desk - symbolically, I say, becauuse they will not be accepted. The lender will have assembled all the documents forgiving each mortgage in the pool, and will hand the pool representative those documents and a check for the loan. That person will then hand the check to the representative of the bond's maker. That person will hand the coupon book to the lender and the bond itself to the pool representative. The lender will then return the symbolic titles to the pool representative for return to the homeowners, and that will end the transaction until the loan is paid and the bond paid off 30 years later.
Note that upon purchase and pledge of the bond as collateral, the value of the pool is immaterial to the mortgage holder that is entitled to the revenue of the bonds; that is already purchased and pledged over the life of the bond and loan agreement. The bond itself is guaranteed and insured by a municipality and collateralized in the event of default by an automatic lien against local property tax revenues.
The effects of the Closed Housing pool would be several: First, it would take the homes off the books of any bank mortgage holder, resolving definitively any questions of title and any liability for homeowner or association dues, fines against the property and property taxes, and avoid any liability claims that may arise in the future from a foreclosed, vacant or abandoned property.
The mortgage holder would also enjoy a substantial tax deferment and perhaps, if authorized by Congress, a tax credit. The owner would retain title to his home, which will be returned by the pool upon purchase of the bond with its value unchanged.
With the low payment of $141, as in my example, the owner could rent the property at a substantial profit, and sell it a premium due to the existing pool agreement for cash. Any future loan against the property would be a first trust deed and the sole responsibility of the buyer.
This plan is one that can start with homeowners, acting on their own and assembling their own pools, or be mediated by cillage, town, city or county governments, encouraged by states and federal lawmakers who feel capable of helping homeowners form the pools, or even by non-profit agencies, or Fannie Mae and Freddie Mac, that have as their charter the restoration and maintenance of home ownership. The legal costs need not be substantial. Banks may be among the first to see the benefits and begin organizing owner pools themselves.
What is really required for the idea to work is for people may not ordinarily work together to reach out to their neighbors and friends, or even strangers to form the pool, hopefully under a set of boilerplate documents. The greatest issue is the fair appraisal of the homes. Banks will probably challenge appraisals, but in light of a welcome and guaranteed revenue stream instead of the endless and costly legal hassles home foreclosure brings to banks these days, they should see the benefit of cooperation.
With economists predicting that as many as 20 million homes may yet face foreclosure as things now stand, and yet another sharp fall in home values announced yesterday, they may have little desire but to cooperate and think of themselves once again as a genuine part of the whole.
Joe Shea has been Editor-in-Chief of The American Reporter since it began publication on April 10, 1995.