Homeowner's Blog

Healthcare: The Art of the Possible

Healthcare legislation is in the news a lot these days. Popular support for President Obama's plan is eroding according to the polls. Faced with that challenge, Congressional supporters have been expected to either go for broke or else cut out some of the controversial parts. The latter would include reducing the total cost (one of the big sticking points), as well as removing relatively minor provisions that have become very controversial (insurance coverage for end-of-life counseling, for example).

A third alternative has been gaining momentum the last several days. Senate democrats are thinking about dividing the bill into two parts. A less controversial bill with little or no budget impact would be voted on first. It would include such generally popular provisions as prohibiting insurance companies from denying coverage to consumers based on pre-existing conditions. That should pass easily, probably with significant Republican support. The big fight would be over the far more expensive second measure. Some parliamentary procedures could make it possible to pass the bill with only 50 votes. However Senate Democratic leaders would still have to consider the public opinion polls. Even if they could pass a very expensive bill, that could come back to haunt them in the 2010 mid term elections.

Whatever course Congress follows, we hope that they will keep in mind that the vast majority of homeowners support healthcare reform in one form or another. Some want it all right now, while others support only parts of the proposals that have been offered. A lot of homeowners are both moderates and pragmatists. We want to see the situation improved this year, and would rather save some fights for later than have the effort fail because the extremists of either party were unwilling to compromise.

The two prong approach is starting to look pretty attractive. If Congress can pass a widely supported package with substantive improvements most homeowners will be happy. They can then relax, make some popcorn, and sit back and watch the next fight between the extremists of both parties.

Mortgage Bankruptcy Bill Could Be Revived

We applaud Senate Majority Whip Dick Durbin's decision to consider resurrecting the bankruptcy bill if the financial services industry is not able to complete 500,000 mortgage modifications by November. Foreclosed homes are nonperforming assets whose liquidated values are 8-10% less than their current market values after selling costs. If the homes aren't kept up or are vandalized their values will be even less than current market values. Once the real estate market stabilizes we will be lucky to return to historical 2-4% annual appreciation rates. Subtract carrying costs (taxes and insurance) and the measly net return makes holding foreclosed homes a poor long term investment for financial service firms' stockholders.

It is therefore very much in the interest of the industry and its stockholders to complete those modifications whenever it makes economic sense, and taxpayers are even underwriting the administrative costs of modifying those loans. It makes economic sense any time financial services company can restructure the mortgage for at least the homes current market value and the borrowers new payments will be 31% or less of their current income. The financial services firm would save the selling costs and future holding costs (taxes and insurance). With the likely measly net rate return if they held the asset, it would take  many years of appreciation before they could liquidate the home for more than that.

There are many homeowners who can't afford their current mortgage payments, but could afford to make the payments on a reduced mortgage principle equal to or greater than their home's current market value. Creditors should be voluntarily and aggressively reducing those mortgage balances to such levels because it is in their stockholders' interest, but most are not. Bankruptcy judges are also charged with protecting the interest of creditors. If the bankruptcy bill passes they would have the ability to restructure the mortgage when it is the interest of the lenders, and the responsibility to order a foreclosure when a homeowner is unable to make payments sufficient to provide lenders a reasonable return on the current value of the home.  This is not a cramdown for mortgage lenders, it is a helping hand.

Mandated arbitration between borrowers and servicers prior to foreclosure is also a good idea provided steps are taken to assure arbitrators are totally independent of industry influence. Allowing homeowners to stay in their homes for some time while they pay fair-market rent and creating financial penalties for firms that fail to meet the administration's foreclosure-reduction standards are also good options.

More Cash for More Clunkers?

One of the objectives of the nearly $1 trillion budgeted for the federal stimulus program was to get the money into the economy quickly in order to head of another Great Depression. The $1 billion that Congress appropriated for its Cash for Clunkers program was gobbled up by new car buyers in a matter of weeks. The pluses of the Cash for Clunkers program are that it has gotten stimulus money into the economy very fast, targeted the bennies to a severely impacted segment of the economy (autos), helped middle class consumers who typically own clunkers, and helped the environment.

With early signs of nascent recovery still inconsistent, putting more money into a quick impact effort like this to reinforce the early positive economic signs still makes sense. On the flip side however, we need to start thinking about the effect of some of the other budgeted stimulus funding that won't kick in until next year. If the recovery does take hold this year, as we all hope, the additional stimulus spending next year may not be necessary, and could even prove inflationary.

We should keep a close eye on the economy over the next year. It may well be healthy enough by next year that we will want to cancel some unneeded stimulus programs that have not yet kicked in. That could save us substantially more than the $2 billion we're spending on extending cash for clunkers for another couple of months. Let's hope this Cash for Clunkers spending now helps further shore up the recovery. The result could be a win-win for everyone, helping to make it possible to cancel even larger amounts of the unspent stimulus spending next year and reduce the federal deficit!

Bruce Hahn
American Homeowners Grassroots Alliance