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BROWN: Putting the foreclosures to rest

By Randy Brown

Published November 24, 2008 at 12:01 a.m.

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We have seen the government’s solution, and it is not working. The banks are keeping the billions they have been given, and are using it to remain solvent. None of it is trickling down to the people who really need it. In this case the word “none” is not an exaggeration. The banks have not rewritten one loan for an American taxpayer.

In frustration, I had an epiphany.

Here are the details: With a legislative change we can put to rest the problems with foreclosures in Colorado. The solution is free, and will directly benefit the taxpayers of Colorado, without costing the state a single dime.

The governor or the legislature need to make all loans non-qualifying assumptions in Colorado. They can do this by passing legislation that makes it illegal to call the note on an assumption, and illegal to raise the interest rate on an assumption in Colorado.

Now every home with a problem loan will have two values. The first is the value of the home itself, and the second is the value of the existing loan or loans. Instead of the loan being the problem, it becomes, in many cases, the solution.

Think about this: If you have a loan at 6.5 percent for 30 years, and the loan is assumable without qualifying, many investors and buyers will buy your home just because of the loan that is in place. To them, and to many other buyers, a 6.5 percent loan is an incredible deal. After taxes that loan is only a 4 percent loan, and there are other tax write-offs, especially to investors, that make this investment better than any other investment: better than gold, better than stocks, etc.

Investors and buyers will buy houses as an investment, and the existing loan, which will be assumed, will be a positive feature.

An example: You have a loan of $230,000, and your home is only worth $200,000. An investor assumes your loan at $230,000, and takes over your payment. He has a great rental at 6.5 percent (the existing interest rate) and rents the property. He gets a great write-off, a great interest rate, and a set loan with, in your case, 27 years left until it is completely repaid. The loan on your home gives it value, even though you owe more than your home is worth, because of the tax benefits to the investor. This will sell half of our inventory. Buyers from all over the country will buy these homes, and investors will form consortiums to purchase homes. Other buyers will buy homes, buying a home for their parents, or kids, or a new home for themselves.

The assumable loan on your home will be an added value item. It becomes the solution instead of the problem.

OK, there are some loans that no one will assume, and they will still go into foreclosure. No one wants to assume an ARM at 10 percent. But, we can package those in with other loans and homes to sell as package deals to investors and buyers. You get six good loans and one bad one. In any situation, any loan is assumable and adds some value. At the very least, the loan that is too expensive will give a base value to the home, and that will still establish an investment value to an investor. Non-qualifying is the key.

Lenders will hate this. They won’t make any money, so they will lobby against it. Since they made money on the original loan, it is, to me, irrelevant if they do not make another profit on this assumption. We can give them a half-percent assumption fee on every assumption to placate them. Since we have already given many of them a few hundred billion dollars, it is a bit hard to feel any sympathy for them at this point.

Who will win: Every homeowner. Why: Values will stop falling, because the loans that are in place will be assumable at the existing rate, and buyers will be able to buy them.

Who will lose: The banks will not make a substantial profit from the assumptions. Tough.

What will it cost: Nothing. It is a legislative cure to the problem that can be enacted by the state legislature, which has no cost to the citizens of Colorado.

Will it cure all foreclosures: No. But it will stop the market from getting worse, and it will allow most borrowers with loans to sell their homes without foreclosure.

That is the idea, isn’t it?

I can already hear the critics, saying that this step will stop lenders from loaning money in Colorado. Since they are barely loaning any money now, that is a very small problem, and besides, if we have all of these assumable loans, who needs their “new loans”? In truth, the lenders will have billions in existing loans that will not be foreclosed on, that will continue to return the original interest rates of the original notes. They will hate it, but they will thank us.

Break the paradigm where the banks are in control and where they control the money. This is a serious time that requires a serious and creative solution.

That is the solution, and it is free.

What are we waiting for?

Somebody call Governor Ritter.

Randy Brown is a real estate agent in Littleton.

Comments

  • November 24, 2008

    6:17 a.m.

    Suggest removal

    Mike_In_Hartsel writes:

    So, we have a real estate agent who wants the government to "guarantee" all homes will go up in value? Can we really believe he is telling us the whole story?

    What's that thing about no free lunch?

  • November 24, 2008

    11:24 a.m.

    Suggest removal

    underthebusinvestments writes:

    I'm a real estate agent!
    I'm entitled!!
    This recession is stealin' my sho'!!!

    Remember!:
    http://www.ireport.com/docs/DOC-33467

  • November 25, 2008

    10:51 a.m.

    Suggest removal

    johngalt4921 writes:

    I read this yesterday, and I thought about it the rest of the day. This is a great idea.
    Why isn't this being done?
    Seriously.
    I can't think of a downside to this idea. Who do we call to get this started?
    JG

  • November 25, 2008

    4:41 p.m.

    Suggest removal

    Roasberry writes:

    I think Mike_in_Hartsel is overreacting -- first of all, I don't see that Randy Brown suggested anywhere in his article that home values were going to be "guaranteed" by the government to go up. What he appears to be offering instead is a realistic method for stabilizing home prices and preventing them from going through the floor. As such, this could be a practicable way to address one facet of an ongoing economic crisis that has no easy remedy. It will take efforts on many fronts to bring the economy back to equilibrium, and I see this idea as one excellent suggestion to address the issue of declining home values. The fact that Randy Brown is a Real Estate agent is somewhat irrelevant. Granted, he is in a line of work that has been heavily hurt by the greed and stupidity of lending institutions, but we've all been hurt. It would seem to be a natural response for a real estate agent to suggest ways to improve the housing market, and there is no implicit conflict of interest that I can see in this proposal. The only persons who stand to "lose" might be lenders, but they are rapidly coming to the position where they are going to be trying to squeeze blood from turnips anyway, so in the long haul, even they would profit from a stabilization of home prices, even though their profits might not be as obscene as they once were on assumable loans. As Randy says, "Tough." What I would like to see is a peer review of the idea by others in the real estate industry and, if the idea is found to have merit, efforts to lobby the state government would seem to be in order. The idea Randy has proposed seems to benefit primarily the little guy, and that's you and me, Mike.