Grave concerns about the new economic plan presented

by Chris Markham. 0 Comments

If youre the fan of this column, you know Ive expended quite a few thoughts, words and columns on the state of the economy and the real estate industry.

Even though it looks like there may be a slight recovery in the works, (and I base this purely on anecdotal evidence it seems as though there are enough people that can re-finance their properties and purchase properties at short sales or those going into foreclosure) I still have some grave concerns.

Specifically, about the new economic plan presented this week by the White House.

Now, the fan of my column knows Im not really that into President Obama. So my opposition to his new plan shouldnt come as any surprise. However, I really have no good solution to the problem the Presidents plan attempts to address.

I dont know if there is a good one out there.

On the one hand, I guess its good that a significant concern of mine is being acknowledged, but on the other hand, a plausible solution to the problem at hand may not even help.

Without any further suspense, the new plan discusses properties that arent in foreclosure, but are charitably known as underwater i.e., the mortgages taken out on the properties are worth far more than what said properties are worth. The issue with these particular properties is that the owners cant do anything with them; if they refinance, they have to write a huge check to cover the difference in the value of the property; if they sell the property, they have to write a big check. In either scenario, no one is getting out of the transaction without a great deal of pain, except for the buyers.

Heck of a choice.

But dont cry too hard for them. A great many of these properties are high-dollar loans. I dont believe the plan concerns properties that have mortgages for $85k and are now valued at $70k. These properties are upwards of $500k, and now the properties are worth roughly half of the mortgage amount. Of course, their properties were purchased at the height of the market, and maybe, just maybe, a few owners took out lines of credit against their homesteads, driving the disparity between value and cost.

So what do these people do?

Some, such as myself, have predicted that these people will walk away from their properties just throw the keys at the mortgage companies and scram. What will that do to the economy?

At large, hard to say. The mortgage companies will have to write off significant parts of the mortgages, but, to make up for it, they have inventory they can sell at market prices. Sure the banks will lose some interest that was projected to be earned, but, in the grand scheme of things, worse things could (and have) happened.

The big losers in this scenario are local governments. Without that sweet, sweet property tax money, said governments will have to make do with substantially lower property tax collections. How will local governments survive?

Another loser in this scenario are builders, who are having a pretty tough time of it right now. With a flood of new inventory on the market as a result of the possible abandonment of a ton of properties, builders wont be in demand to build anything. Get into remodeling fellas or perhaps demolition, because that would seem to be the extent of your demand.

Now, the plan (boy, I buried that lead, didnt I?) calls for the differences in these mortgages between market value and the amount of the loan to be essentially purchased by the federal government. Well, not purchased, per se.

What will happen is the banks will forgive the difference, and Fannie Mae and Freddie Mac will pay the banks, over time, the forgiven amounts. People will stay in their homes, banks wont have to forego their estimated or projected revenues, and local governments are still able to fill and re-fill and re-fill then dig up, then re-fill your favorite potholes. Oh, and builders wont be out of work, as the inventory of new homes will be low. Sounds divine, doesnt it?

As I stated earlier, I dont have a solution to this mess.

If I had my druthers, the economy would have never been bailed out for God's sake. But how many more people/businesses/sectors of the economy can the taxpayers be expected to support? I used to have faith that the invisible hand of the markets would control the economy, but, with all of our meddling in it, that theory can be shot straight out the window.

In lieu of the invisible hand, I present to you a new theory of economics, one that seems to be used more and more these days the backs of the taxpayers.

Chris Markham writes a weekly column for fredericknewspost.com.

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