(Mark Noonan) – First off, let me say that I’m impressed by Mike Montandon as a candidate. I haven’t made my decision on whom I’ll vote for in the primary, but Montandon is high up there in the prospects, as far as I’m concerned. I state this because I don’t want anyone thinking that I’m against Montandon. I’m just against his FAST idea regarding our collapsed housing market.
Here is how Montandon describes the plan:
“Suppose that a home was purchased for $300,000 in 2005 on a 5-Year 0-Interest ARM, this summer the 5-year arm readjusts and the homeowner is unable to make the new payments. The home is now worth $200,000, and to refinance the bank will only make a loan on the value of the home, so the homeowner will have to come up with $100,000 to satisfy the original loan.”
This plan does not recognize that the house sold for $300,000.00 in 2005 was never worth that much. It was an over-inflated market brought to us courtesy of government idiocy, banker foolishness and consumer greed. It doesn’t matter if the house has an ARM on it, or not, except in that the ARM may cause a homeowner to bail out faster than otherwise. But I’ll bet that nearly everyone who is “underwater” on their home loan is at least considering walking away.
The fix, if we’re to have one, will require a means whereby the homeowner stays in the home, the bank has at least a shot at recovering most of the original loan amount and the State of Nevada, which doesn’t have any money, isn’t forced to pay anything. There is only one thing which fits the bill: “cram down”.
A “cram down” is when the loan amount on the house is reduced to the fair market value of the home. While there would be no way to get it 100% correct, reasonable people can review a house situation and arrive at a rough figure of what it is really worth, and then set the loan amount at no more than that. And so a house which was purchased for $300,000.00 in 2005 and is in a zip code which has lost, on average, 40% of its value would have a mortgage amount of no more than $180,000.00 (if the mortgage amount is already equal to or less than that, then nothing needs to be done).
This will cost the banks some money. It will cost the homeowners some money. To take myself as an example: My house was purchased for $396,000.00 in 2005 and best estimates are that its lost $226,000.00 of that value. I have paid, in down payment and mortgage payments, about $130,000.00 since that time. If my mortgage were reduced to current market value, I’d lose my $130,000.00 and the bank would lose some of the interest it was expecting to get over time (I would have paid about $800,000.00, all told, by the maturity date of the loan: now the total cost would be in the neighborhood of $500,000.00 – still more than the original loan amount). I lose. The banks lose. I stay in my house – the housing market wins because there ends up one less house in short sale/foreclosure, dragging down all home prices. But it costs Nevada – and thus the taxpayer – nothing.
We do need bold initiatives to get a handle on our problems and I congratulate Montandon for at least thinking a bit outside the box. But we need a solution which costs the State nothing and repairs the housing market – and that means keeping people in their homes unless it simply becomes impossible for them to pay, at all (such as some poor person who has lost his job). The quiet dogmas of the past will avail us nothing – it is time to think anew, and act anew.