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Obama Needs You….Now!!

As the extraordinary events of Wall Street enter the 6th week, our nation pauses to celebrate an historic Presidential election. Barack Obama is the 44th President of this great nation! Can you imagine the burden Obama must have awoken with this morning? In his words: Two wars, a planet in peril and the worst financial crisis in our history. So now it is time for our leadership to get back to work with the unprecedented implementation of the $700 billion bailout plan approved by Congress recently. Thus far, it has proven infinitely more important to the press and political party’s to assign blame for the problems at hand rather than explore workable solutions. In so doing they have squarely become part of the problem. Of course, discovery is important to hopefully ensure this will not happen again, prosecution is inevitable and needed, but the much greater use of our time for America is achieved by crafting a plan to manage the mammoth task at hand with a goal of minimizing the potential loss. Implemented poorly, we exacerbate a financial problem for ourselves, our children and grandchildren. This is an area of expertise that we as Real Estate Investors can offer meaningful input to our leaders in Washington.

So, with this in mind Dwellgo would like to place several scenarios before our community in the coming weeks and ask YOU to offer your expert opinions. We will attempt to harness the collective wisdom of these efforts and draft an action letter to our Congressional constituents sharing our thoughts and ideas. We hope to culminate this effort January 1st 2009. Please take a few moments and submit your input. Become a part of the solution! Obama and the rest of our country needs your help.

Scenario #1

Currently their are several million Sub-Prime loans outstanding in America. It has been estimated that 30% of these borrowers are behind on their mortgage payments. Clearly help is needed, however one of the biggest dangers in offering help to the 30% in default, is the response of the other 70% who are current. If we take the position that financial help is available to delinquent borrowers only, we run the risk of alienating the 70% who are current on payments. History has shown if current borrowers are penalized for being responsible payers, and delinquent borrowers are rewarded with relief, current borrowers are inclined to willingly get behind on payments so they too can enjoy financial relief or windfall. The plan created to contain and ultimately solve the problem inadvertently creates a bigger problem.

So…..With Scenario #1 in mind, how would you advise the Government to implement a plan that;
1) Minimizes loan loss,
2) Minimizes foreclosures,
3) Does not penalize borrowers who are current on their mortgage payments? (Maintains some sense of fairness)

My Answers:
1) If relief is offered in any form to delinquent borrowers, an equivalent help/relief is offered to all sub-prime borrowers in the same income bracket.
(Ex: Delinquent borrowers with Gross income up to $40,000 can refi at 5%…..Current owners w/ gross incomes up to $40,000 can refi at 5%)
This will immediately remove any strategic motivations to purposely get behind on payments for current owners. It will also breed a sense of fairness into the market. This will greatly reduce foreclosures and more importantly, will prevent a potential avalanche of future foreclosures.

2) Delinquents can refinance and roll all back payments and closing costs into the new loan, with no qualifying and no appraisal. ( Reasoning: The government already has the problem loan to deal with. Value of the home, and qualifications of the buyer are meaningless at this moment. The refi will quickly produce a lower payment, thus reducing the rate of foreclosure)

3) Delinquents have a certain time frame to refi. If they do not in the allotted time frame, they are to be foreclosed on. (Reasoning: Be willing to help those who are willing to help themselves, and be willing to acknowledge that some will work the system to their advantage, no matter what the circumstances. Distinguishing between the two minds sets is crucial. Help those who need help and eliminate those who are attempting to unfairly work the system)

4) Participating lenders can claim an 80% reimbursement from the loss in monthly flow. (Ex: If the loan was to roll to a 7% rate but the lender refinanced the Delinquent at 5%, lender can claim 80% of the 2% delta as long as the loan is current) If new loan goes into default, lender forecloses.

5) If Delinquent can find a Buyer who agrees to assume the present loan in default and make up all back payments, Buyer can pay a $2,500 assumption fee to lender in exchange for no qualifying and a 5% fixed interest rate. Buyer also agrees to a 5 year balloon. (Reasoning: The loan has a better chance with new ownership to stay current given the buyer now has a cash out of pocket commitment to the loan. “Skin In” loans have much lower default rates than “No Skin In” loans)

Now it’s your turn!
Please send in your ideas and let’s see what we can collectively come up with. Remember, it’s your tax dollars in the balance.

Jay Otto

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