Moving towards equity loss write downs...

The RealtyTimes News feed this morning had a story about how builders are abandoning the traditional McMansions in favor of smaller, more affordable new homes. That’s a good sign overall that the industry is adjusting to the needs of the current economy. Another part of the same story talked about negotiations that are on-going between states and major lenders to try to get the mortgage industry to bite the bullet and write down some of the lost equity value on underwater houses. That’s a strategy that makes a lot of sense.

There is a significant portion of the market that is frozen in place by the current negative equity situation – people who want to sell, but can’t because they are so far underwater on their mortgages. While a few greedy, or maybe not so intelligent homeowners, did treat their homes like piggy banks and took equity out for other uses; the vast majority of underwater homeowners are innocent by-standers who did nothing wrong, but who got caught up in the tsunami of the current economic mess.

The lenders have been waiting all along for the Federal government to figure out a program that will take on their losses or at least share the losses. In the interim, they got caught cheating on foreclosures and now face disciplinary action by the states. Perhaps that stick is big enough to spur them into action; especially if the feds can figure out a way to add a little bit of carrot into the equation.

Since the banks have concerns about the write downs impacting their capital requirements, something as simple as the Fed’s coming up with a way to allow the lenders to move the loses off their books would probably provide the needed push to get this going. Maybe they can get some of the Enron people out of jail to help them with that issue. After all the Enron management team are the guys who figured out how to move all of their bad debt off their books.

Until this issue is resolved, we have a nation of people who are delaying retirements or job moves or other decisions that involve selling their homes; because they can’t afford to take the losses involved. We can’t really turn things around in the economy either, until we get people out from under this huge debt load and get rid of the bunker mentality that surrounds this issue.

Local businesses and communities will continue to feel the impact of their citizens being basically unable to spend on much other than their mortgage payments. Short sales and foreclosures will continue to have a huge negative impact on local communities and local governments. We need the financial reset that can only occur if lenders are allowed to modify mortgages at lower principal levels and write off the lost equity. Then we can start growing again.

The biggest hang up right now seems to be that no one can figure out how to triage the situation – how to determine those who will get help and those who just won’t qualify. Fairness or at least the perception of fairness is very important, if any program is to work. There will be people who would try to game the system, no matter what the system is; and there will be people (tax payers) for whom there is just no benefit at all (people who have paid off their homes or held them so long that they are not under water); no then no system is completely fair. The important thing is to get on with it, so that we can get the American economy out of neutral and rolling again.