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Government does not be in the "guaranteeing" a home business. No where in the Constitution or Bill of Rights is there an explicit guarantee for every citizen to possess a home. People are only willing to buy now using establish fundamentals; mortgage equals rents with 20%+ down. Everyone wants their own bailout, too hilarious.
The banks need to realize that either the allow short sales to close or these debt slaves are going to walk away.

They shouldn't be in the lottery business either, or any of the plethora of subsidies they fund.

But they are. If they are going to meddle, let's give them a better way to do it.

Whenever I come up with these ideas, I fax them to the White House and to Hank Paulson. Last time I got some hits from them too - hopefully they are reading this!

Not a bad idea for those hoping to get back to making a living selling and financing Real Estate right away. The idea that the government can do anything but prolong this mess is wishful thinking at best. Let things run their course. Its going to hurt for a few years (yes the gov will prolong this as long as they need to get elected-don't help them come up with new ways to screw it up). Sorry Jim-love your blog but your profession is trashed for a few years at least if not changed forever.

It has changed forever.

So what you're saying is that government should artificially prop up young first time buyers.

This is something I completely agree with. instead of allowing the fed to inflate the banks problems away. Or just handing out money in the form of an inflated tax return.

There's 2 problems to this approch.

1. Government doesn't care about young first time buyers. They don't lobby congress or donate to campaign funds.

2. Any time you create a government agency to help a specific group. Over time it morphs into a huge bureaucratic nightmare that often doesn't even represent the interests it was initially designed to resolve.

If you let the free market do it's thing banks that were run poorly go out of business. Those that followed the rules and invested properly will get ahead. The same thing applies to home buyers and sellers.

NO BAILOUTS!

This is how Washington really works. Lobbyists paid by 'you name it industry' are at the door and phone of every elected person in DC. Thats who they listen to, and not us. The lobbyists have one goal in mind.....get this big money losing problem off their business and onto us...the taxpayers... who have absolutely NO control over Washington....and they will NOT STOP until they win and we lose, so we will be hearing bad plan after bad plan for the taxpayers until Washington finally caves in.

I find the entire thing repulsive, but the ship has long sailed on government actons I find repulsive.

I would support this plan above almost anything else I've heard because it at least has the virtue of honesty. The government will be transparently shifting the cost of financing homes from one group of people who get them to another group of people who have to pay for them by the mere fact that 51% of the people have the power to force it down their throats.

At that point, it's on a par with Medicare, Social Security, and other entitlement programs. Housing soundns like a dumb entitlement to me, but if our culture has come to the point where most folks think they'll be getting something free from others by doing this, then there's not much I can do about it and the best I can ask is that implements such a program in a transparent way.

For our local market, why don’t CAR, DataQuick and the Tribune do a study on how much the people using the non-conventional loans over the past few years here could have actually afforded using a fixed 30yr mortgage and print that data. Then the sellers could have a real gauge for pricing their homes in a normal market.

Instead they just put out the numbers of how the median has dropped from close to 600K to 400K and say it is now time to buy because it is MORE AFFORDABLE. Every once in a while they put in the fact that you still need a household income of 140K a year, double the county average, to buy that 400K home.

There is no need for a bailout of any kind. Just let the market reset on its own and it will be back in line with historic prices in a year or two and we can move on to the next BUBBLE(oil, precious metal??).

Of all the ideas I have seen to "fix" the problem (other than letting it fix itself at the cost of hurting the guilty and unfortunately a lot of innocents as well), this is by the far the best.

Not sure I understand why you are not using the limit of 417K (I thought this was the "conforming" value) but I will assume you have a good enough reason or that I don't know what I am talking about. 3% of your number is about 11,000 dollars. Yes I know many people can't afford that straight up but it seems quite reasonable of a hurdle to buying a house.

I think I would be quite fine with allowing the interest rate to creep up to 6% though. I don't think such a program should be offering the "best" rate possible. People with stellar credit history and more money down should be getting those rates (since they would presumably be far less of a risk). As well as 6% is actually a great interest rate historically (to which I mean beyond the last decade).

As a (waiting) first-time buyer with my 20% down payment ready to go, I like the idea, though I'd still fall on the side of insisting on no bailouts. LET THE FREE MARKET WORK ITSELF OUT. Somehow, some way, irresponsible people will find a way to take advantage of a situation and just prolong the inevitable.

But Jim makes a good point that the government will insist on doing something. So why not this?

"For those current homeowners who are buried, they can go get back in line - FHA will fund a loan three years after a foreclosure." This is very well said, and really puts these ridiculous bailouts in perspective. If you ask me, this is an incredibly soft price to pay for being so financially irresponsible. Why give any more help?

Of all the ideas I have seen to "fix" the problem (other than letting it fix itself at the cost of hurting the guilty and unfortunately a lot of innocents as well), this is by the far the best.

How would innocents be hurt? People who bought more than they can afford ARE NOT INNOCENT. They are just as complicit in the fraud as the lender. Ignorance is not a defense.

There really is only one fix, lower prices. Everything else is just re-shuffling the deck chairs on the Titanic. The fact that a lot of peoples illusions of wealth have to disappear in the process is a positive, not a negative.

All a bailout will do, any bailout, is lock people out of the home buying market and encourage another round of bubbles in housing. Who wants that? (*rhetoric, lots of people do)

Keith,

When I checked this morning the FHA loan limit was still at $362,790 - there has been talk of raising it to the conforming limit of $417,000, but I don't think it's happened yet.

If the FHA folks started thinking of raising the limit higher, it would probably help, but I think it's fine right where it's at - there would be trickle up.

The government should NOT be using dollars forcibly taken taxpayers to subsidize real estate.

One solution would be to end all tax write-offs and interest deductions for non-owner occupied homes. Force non-owner occupied homeowners to pay taxes monthly.

Rate the mortgages for investor purchasing purposes based upon the lower of the current debt to value ratio or the 5 year average value to debt ratio.

In sales of homes other than owner occupied the taxes should be at the higher rate of the income tax rate or capital gains tax rate.

It is better to have a stable market than one with deep troughs and peaks.

The banks are holding onto the REOs in the hope that they can get more out of them and the sellers are doing the same. It is only those who are forced by lack of cash flow to sell that are doing so.

There should be a tax free savings account for a owner occupied home only for those that do not own any real estate and limited to 20-50% of the national median price of a home averaged over the past 10 years.

One man's opinion.

Robert I think this sounds great if I understand you right:

"There should be a tax free savings account for a owner occupied home only for those that do not own any real estate and limited to 20-50% of the national median price of a home averaged over the past 10 years."

In our situation at this time, we are renters and I feel that we are now being penalized for sitting on a pile of cash (combitnation savings and equity from a sale 5 years ago) because we just applied for financial aid at an independent school for my high school daughter...

The financial aid verdict is that we can afford twice as much as we predict. So I guess we will have to plead our case, if we had that same money wrapped up in equity it would not count.

So your idea of a sheltered savings account would benefit those who are setting aside money for a down payment. And it should be treated just like equity when peoples' assets are being scrutinized for whatever reasons.

Jim,
You do not mention any kind of qualifying besides the 3% down - whatever happened to having to prove that you really can afford to buy a house.

I don't think 3% down is enough.

I think it better the government get into the buying and selling of homes rather than the financing. The county recorder office can handle all the escrow and title and regulators can limit fees and commissions to $1000 plus 1%. Brings down costs a lot more than fixing interest at 4.75% and that is the point, to bring down costs not protect any particular business model. With the new limits immediately fewer people would be looking at selling their homes at a loss.

Jim,

I think these are good ideas, and I am all for (a) getting prices down to "sensible" levels (b) boosting the entry level buyer's chances of getting in the door. I am more of a "hawk" on the down payment though, and would like to see the minimum at 10%. I don't know what this would do to the rest of your math. It may seem like it confounds (b) above, but it probably would accelerate (a) above. Therefore a wash? Also (c) "buy it to live in, not get rich quick", as you say.

Government can be a solution any problem. Look at socialism... just not a very efficient solution.

We have a liquidity problem. Housing was reprised upwards due to easy lending at low rates. Now the rates are not so low and the lending is not so easy. We can address this EITHER with looser lending terms or lower prices. Lets be honest (for once) and acknowledge that easier lending does not make houses more "affordable". We just reprice upwards and put people in debt for a lifetime. THE FASTEST WAY TO FIX CURRENT CONDITIONS AND HELP BUYERS IS TO LOWER PRICES, DRAMATICALLY. This is actually happening, but not quickly enough. If we really want to start selling houses again, get to the price bottom as quickly as possible. To do this, encourage people to walk away from homes in which they have negative equity. Remove the remaining social and economic stigmas to walking away: state taxes and credit scores. Bankruptcy and tax reforms can do this quickly.

People will have to leave their homes, but in many cases this is going to happen eventually anyway. They will be able to buy a cheaper home on the market, and if there is no stigma, they can move on and everyone will have more affordable homes. Even lenders will be OK in the long run (they will be crushed in the short term, but they deserve to reap the whirlwind for behaving so foolishly in the first place). Repricing the risk will simply involve returning to more rigorous lending standards, which is happening anyway. If we stop giving $1m stated income no down loans, people will not walk away from homes in the future and prices will never peak so quickly, or fall so dramatically.

Washington bailouts are bank subsidies for bad lending standards. Attempting to move the housing business onto government books is socialism, plain and simple. If we need government to sell houses in the US, we should not have them. There is very little that is public about housing as an economic good. I thought we had learned these lessons. What is deeply disconcerting is that the lessons never seem to have been internalized, not even by Republicans. A series of government interventions created a housing bubble. Now there are calls for more government invasion of the housing market to "fix" things. Can no one see that this is just more of the same errors that created the present problem?

I'd much rather have higher interest rates and lower prices. Artificially surpressed interest rates are what got us where we are now.

The only govt intervention I'd like to see is for the govt to force lenders to sell their REOs within 90 days of the Trustee Sale, to help mitigate the problems with blighted neighborhoods. They should also force the lenders to maintain the properties while in their posession. If they don't maintain them or sell them within 90 days of TS, the govt will take over and maintain and sell the properties at their weekly auctions. The government would get first lien position for all associated fines, administrative, maintenance and other costs incurred by the taxpayers -- plus interest, of course! The lenders could get whatever remains.

That way, taxpayers could actually benefit from this mess, instead of having to pay more for it. We're already paying enough with the destruction of the economy heaped upon us by the unscrupulous lenders.

Forgot to add, would also eliminate any grants or housing subsidies of any kind. These only serve to push prices up -- do they really think sellers aren't going to raise prices to reflect the additional money coming into the system? "Affordable housing" subsidies only make things LESS affordable.

Would also eliminate the mortgage interest deduction and Prop 13 protections for non-owner-occupied homes. I'm a strong advocate for Prop 13, but not for rentals or second homes. It should be used to keep people from losing their homes in speculative markets.

Raise rates to 20%. Prices drop like a rock. Lower rates.

Problem solved.

Here's a better fix. Let the whole stink'n corrupt RE market crash back to earth. Then people can afford to buy again.

What all these plans seem to have in common is to try and keep home prices artificially inflated. If you truly want the market to return to normal, then prices need to fall where the median wage earner can afford to buy a median priced home using a 30-year fixed rate with a 20% down payment (sorry Jim, 3% is nowhere near enough, and causes home prices to be artificially inflated and makes it too easy for people to walk away when their home falls in value) . When I mention this to people, the answer I get is "who has a 20% down payment? No one will be buying houses in Southern California". Therefore, what that means is that prices are too damn high, it's that simple, and prices need to fall until a point is reached where people do have a 20% down payment and can truly afford to buy their home.

There's no getting around it, people can come up with all the creative plans they want, but these plans are just getting in the way and making things worse. Just let the market sort this out.

Jim,

This is an excellent and at least from a cursory examination, it works. Good thinking.

Thanks ice.

LR,

I mentioned "make buyers qualify by normal FHA standards" which is a fully documented package.

There is one little loophole with FHA - you can keep adding applicants until you qualify, which is fine if parents want to co-sign for the kids - a better likelihood that the loan won't default.

But others can game the system by adding anybody with a pay-stub and sub-par credit, FHA is pretty lenient on credit.

I think this idea benefits realtors and new home buyers, neither of whom need a bailout. 3% down? that's how we got here, home buyers with no skin in the game. 20% down needs to be the minimum 100% of the time. This will bring investors back to buying mortgages and home prices back (down) to reality.

There is no government bailout that can fix the currrent mess. The firms involved in buying mortgages are demanding better returns (higher rates) - interest rates will continue to rise regardless of what Bernanke does.

I expect home prices to decrease significantly in San Diego County the next couple of years. I am certainly not motivated to consider moving back to SD until at least 6 months, but more likely another year. For those wanting prices to crash you might want to be careful in what you wish for. Jim's plan will not keep prices from going down, but it seems like a reasonble plan to me. I'm conflicted: I would like the CV homes I'm considering to be significantly reduced in another year, but I don't want the market to suffer so much that the economy in SD goes into a deep recession. I will need to find a job when and if I move back.

As I said, this plan benefits new buyers like Living in Mountains - he thinks it is a good idea! - He is probably a nice guy/girl, but I am not up for helping him/her buy a house or realtors (sorry Jim) earn a commission.

P.S. Great realtors like Jim will always make a living and the realtards will go back to their original careers..

You know Erik I am mostly indifferent about any plans to allow a softer landing. I don't see any way prices don't come down significantly for all the reasons we know about, Jim's plan being enacted or not. I am very conservative and may even pay cash for a home. (I'm getting older -- 48 -- and have been a good saver.) So, I will need a job to buy groceries, pay utilities, buy the kids stuff,etc., but I won't need a great job. So, I will be pleased if prices come down another 20% or more, but don't you worry if the market crashes too much, school funding will be slashed, road maintenance will be suspended, quality of life will go down. Or, am I too concerned about social services, if tax revenues --- because many will be out of a job -- take a major beating? I'm not 100% sure about this but Im very bearish on our economy right now.

Government sponsored 4.75% rates will just artificially inflate the entry level market.

The best thing for California is home prices based on real world money costs.

The second best thing for California is for local governments to force the owners, the banks, to maintain and secure the properties and bill and fine them when they do not.

A foreclosure with a green pool, here's your $2500 fine.

In response to Barnaby33 in regards to my comment about "innocents" being harmed as well with the extreme price drops needed to allow the market to correct itself.

The innocents to whom I refer are;
- those that bought with lots down and made their payments thinking their house would go up a bit each year and now find their house at the same price due to the market returning to 2000 prices.
- those that didn't borrow cheap money and watch the irresponsible ones have more house and more or bigger boats and SUVs than they deserve for the last 7 years. It can't seem fair to them that people got to take so much and pay so little for it (a negative mark on your credit report for a foreclosure seems to be a small price to pay for the fun of having those things for "free").

I am all for letting the market correct itself. I hope that the pain that is felt this time will get people to not behave like they have for the last 7 years [I doubt very strongly that it will though]. I also want a free-market correction because supposedly this was a free-market boom (good for the gander sort of thing..). And selfishly I also want it to happen because I lay in waiting to buy the nice house I have been working towards for the last 10 years for when I return to San Diego.

However, I think powerful interests will get the government to do some sort of bailout and given that I think JtR's idea is pretty darn good; that is, it is fair, relatively cheap (from a bailout perspective), and geared to the entry level market (definitely not the 1MM+ market (which I intend to buy into)).

I suppose my wife and I would be one of the "innocents' by your definition, but frankly we don't feel that we have "suffered" all that much, because

-we bought our home thinking we'd get a place to live for a price and financing we could comfortably afford and if its value held or went up it would be a nice bonus.

-watching people live beyond their means for 7 years knowing that it was all going to come crashing down on them eventually wasn't all that frustrating, as we live by the "they who die with the most toys win" maxim when it comes to material things; admittedly, that the govt changing the tax laws so that people no longer have to pay taxes on what the banks write off as a loss does take a bit of the fun off of watching the show.

As we see it, the only way this market might "harm" us is if we find ourselves surrounded by REOs that are being allowed to sit unmaintained to the point where they make our neighborhood feel like a slum.

Jim's proposal seems reasonable enough to me. I've always felt that 3% down was too small a commitment to bind people to owning and caring for the homes they buy, but that's the way it's always been and Jim isn't proposing anything new there.

If you really want to destroy a market, just have the government get involved. At the end of the day someone still needs to buy these loans. What entity (business, foreign government, etc) wants to buy loans that are locked for 30 years at this low a rate with prices being set by the government? What's to keep the government from next year saying that all the loans made at 4.75% will now be 3.75% and whomever bought those loans is screwed?

This is just another idea to somehow control a market, same as all the rest of the plans that don't work (by definition) that are dreamed up by the "smartest minds" that are the same ones that got us here.

Similarly to how the fed cutting rates has actually raised interest rates for home loans, everyone needs to stop thinking there's some solution other than LOWER PRICES... which hurts some people (the ones the government cares about - banks, etc...) and helps others (people buying houses they can afford at lower prices.)

There are already so many incentives to home ownership through taxes that it's simply too much to economically justify. IF BUYERS DON'T HAVE 20% DOWN AND CAN'T AFFORD THE PREVAILING INTEREST RATE, THEY SHOULDN'T BE BUYING A HOUSE!