Help Wanted

Help wanted: Big, bold, audacious recession in search of big, bold, audacious solutions. Immediate opening for the right suggestion. No tepid or watered-down proposals need apply. Clearly this year’s recession is not of the typical garden-variety we’re used to weathering every few years as an intrinsic part of our recurring economic cycle. It’s the deepest, longest and most painful recession in at least the last 30 years, if not longer. So a timid or unfocused response—especially when it involves arbitrarily throwing hundreds of billions of taxpayer dollars at poorly-conceived rescue plans—is not going to generate the stability we so badly need to launch a sustainable recovery.

Now comes word that the Treasury Department has floated a most intriguing proposal which, if adopted, would radically lower mortgage interest rates on new home loans—to as low as 4.5 percent; the lowest in U.S. history. The proposition has its appeal, to be sure, because nothing is threatening our economy—or destabilizing world financial markets—quite like the growing tide of home foreclosures. The Treasury, according to a report in The Wall Street Journal, views this plan as having the potential to stem the slide in home prices by empowering qualified borrowers to afford more and bigger new mortgages, thus increasing demand for homes while pushing-up their values. At first blush, this sounds like a monumental step in the right direction.

But wait. On closer examination, the proposition regrettably stops a few critical steps short of having a much sharper set of teeth. By offering these drastically reduced interest rates only to borrowers who buy a new home—not to borrowers who most certainly would refinance their existing homes if guaranteed the same low rate— the proposition misses an enormous opportunity to both unleash a new wave of consumer spending while preventing the next probable wave of foreclosures among homeowners whose properties are now worth significantly less than their mortgages.

By extending the deal to all homeowners, we would be in complete agreement with Jonathan R. Laing, Senior Editor at Barron’s Magazine who—in writing in the December 8th edition of the investor weekly—offered a hugely compelling case for doing just that.

“The new low rates and lower monthly payments,” he says in the article entitled How to Solve the Foreclosure Crisis, “would be especially helpful for homeowners with negative equity in their homes.” These “underwater” borrowers, he explains, are prime candidates for the next wave of defaults which—if allowed to happen—would add crushing new woes to already overstressed housing and credit markets. “This class of borrowers,” he adds, “account for nearly $2 trillion of the $11 trillion of outstanding mortgage debt in the U.S. ” In Las Vegas , for example, fully half the homes are now worth less than the mortgages on them.

“Meanwhile,” Laing suggests, “the government must help modify the most troublesome group of mortgages—the roughly $500 billion of subprime and Alt-A mortgages that are in arrears and headed for foreclosure….by extending the amortization period from 30 years to as long as 40 years, cutting rates to 4.5 percent (or lower) and, on some loans, reducing principal balances.”

As ambitious and potentially far-reaching as this plan is, Laing predicts it could probably be accomplished for a mere $100 billion. Given the mind-bending amounts of money that have been attached to the haphazardly-conceived bailouts thus far, this proposal not only sounds like the boldest, best-conceived initiative to date, but also like the bargain of the century.

We at Michael Saunders & Company would add a couple of caveats to better ensure the proposal’s timely success. First, it should be easy to understand, easy to navigate through; and offered for a limited time only. We suggest one year; just long enough to stoke new interest and activity in the market, allow homebuyers to study their options and pursue them thoughtfully; but not long enough to encourage them to sit on their hands and hope for further price erosions.

Second, the offer must be extended to primary homeowners only— buyers who plan to refinance an existing home or purchase a new one in which they actually intend to live for a specified period of time, or possibly face stiff penalties. This would put fast-buck speculators and flippers on notice that gaming the system will not be tolerated.

Of course, there would be all sorts of intricate details to resolve— many i’s to dot and t’s to cross—but Laing explains in impressive detail how it would all come together and why it would work. Frankly, we have yet to hear a more bold or thoughtful initiative. It will pull qualified buyers—and their money—away fromthe sidelines and into the market; thus re-priming the nation’s economic pump.

If and when this proposal winds its way past the talking stages and into the legislative pipeline, we will not only be among the first to applaud its passage but will have already thoroughly educated our sales associates on what their customers’ best options are and how they can most fully- avail themselves of the most fantastic home-clearance event of all time.