Updated Estimate of Direct Federal Loans to Be Made Under the AllStreets Bailout Plan
Due to continuing drops in property values, and other data refinements, it's time to update the estimate of the loans to be authorized under the AllStreets Bailout Plan. Under the original plan all mortgages on residential properties, not just the ones in trouble, were to be paid down by 80% of the drop in value from their peak in late 2006 using 30-year 3% fixed-rate unsecured federal loans equally split between the homeowner and their lender. To achieve fairness for American taxpayers, homeowners without mortgages get the same rights to the same federal loans, and adult citizens who don't own a residential property also get rights to the same federal loans equal to 10% of the median property value in the area they live. Those without mortgages can use the federal loan to pay down credit card debt, to finance a business, as a personal loan or as second mortgage money to purchase a residential property. The loans are issued without qualifications and are unsecured except the ones used to purchase a property. Loans used to pay off mortgage debt and credit card debt are split equally between the borrower and the lender.
The plan was conceived in early 2008 an originally published in November, 2008, and the value of Housing and Economic Recovery Certificates (HERCs) that assign rights to loans was estimated at $2.1 trillion assuming a 10% drop in property values, loans equalling 80% of the drop, and a total of 98 million residential 1-4 unit properties not including mobile homes to obtain loan rights. However, since the original estimate property values have already dropped considerably more than anticipated. The latest data from the Federal Housing Finance Agency monthly Housing Price Index shows a drop of 10.5% in median home values in the U.S. from their peak until November, 2008. However, the S&P Case-Shiller Index (TM Fiserv, Inc.) of median home values in the 20 largest metropolitan areas, where most of the homes are located, now shows an average drop of median values of almost 20% through November, 2008, and property values have dropped even more since then. In addition, we've revised our estimate of the maximum number of individual residential structures that would qualify to be 115 million instead of 98 million. So we need to update the math to estimate the total value of loans to be issued under the program.
The estimated total value of all 1-4 unit residential properties in the U.S. was about $23.3 trillion at the 2006-2007 peak. Assume that when the HERCs are calculated for issuance the value of properties will be down 20% from their peak, or $18.6 trillion total, a drop of almost $4.7 trillion. We originally proposed using 80% of a 10% drop to calculate the value of HERCs. To control the size of the program, we now think that 60% of the 20% drop would be sufficient, so the total value of property-based HERCs would be $2.8 trillion instead of the $1.5 trillion originally estimated. 60% of a 20% drop in value equals 12% of equity. Below we've estimated that of the $2.8 trillion in total HERC debt authorizations, about $1.9 trillion would be used to pay down mortgage debt, and that's 15.6% of all outstanding residential mortgage debt. That should be sufficient to rescue most underwater mortgages, when you consider that 75% of homes still have mortgage debt less than 100% of the home value, and that housing values will stabilize or increase over the next few years due to the effects of the AllStreets program itself, plus other economic stimulus measures provided by the federal government.
In addition to HERCs issued to property owners, all adult citizens who don't own any residential property get fair access to the government loans in an amount equal to 10% of the median property value in the area they live. Originally we estimated that there are 180 million adult citizens who don't own property out of the 230 million or so adults 18-years of age or older in the U.S. However, we've corrected that estimate to be no more than 120 million. We continue to assume the median property value at the time the HERCs are issued would be no more than about $160,000, and that the median property value can be fairly used to estimate the average value of non-owner HERCs, so we ballpark the average HERC to be $16,000 for every non-owner, with a minimum of $5,000 each. So, the total value of non-owner HERCs comes to $1.92 trillion (120 million people times an average of $16,000).
Adding the value of property-owner HERCs of $2.8 trillion to the value of non-owner HERCs of $1.9 trillion nets a total of $4.7 trillion in loan authorizations. Compare that to the more than $10 trillion that has already been authorized for various government bailout programs (there's currently talk of at least $1 trillion more to be requested by Secretary of the Treasury, Tim Geitner). However, note that not much of the total of $4.7 trillion of AllStreets loans would be additional government lending. Much of the $300 billion or so loans already made to banks from the $700 billion authorized under the TARP program, could be paid back or effectively replaced by the loans in the AllStreets program. The other $350 billion of TARP that hasn't been spent could be devoted to AllStreets loans. Other large portions of the $10+ trillion in government bailouts are just loan guarantees or unspent authorizations that would never be needed as a result of the AllStreets program. Also consider that presumably the program would sufficiently stimulate the economy that government tax receipts would be much larger much sooner than if the program were not implemented, and, therefore, the future costs of interest on government lending would be significantly reduced.
One interesting question to consider is how much mortgage debt would be paid down as a result of AllStreets loans. There is now a total of $12.2 trillion of outstanding residential mortgage debt (per "Freddie Mac Update, January, 2009"). Also, according to Census Bureau data about 33% of residential properties have no mortgage at all. Although it's difficult to precisely estimate how much of the debt would be paid down by The AllStreets loans, we think it's valid to assume that the 33% of properties without mortgages probably have lower than average value, so, at least 67% of the property-owner HERC authorizations would be used to pay down mortgage debt, and 67% of $2.8 trillion equals $1.9 trillion, or at least 15.6% of all residential mortgage debt. That would go a long way toward relieving excess mortgage debt and freeing homeowners to refinance or sell without a loss. It would also significantly reduce mortgage payments since the payments on paid-down principal would be recast under the program.
Recall some other important features and beneficial effects of the AllStreets Bailout Plan:
The loans are issued without any qualification at all to every homeowner to ensure fairness and guarantee effectiveness.
The loan on each property is split equally between the homeowner and the lender, so the bailout is fair to each unlike programs to date that bail out lenders but not the homeowners who will also foot any tax bill.
Payments on remaining mortgage principal are recalculated based on the new principal and the original interest rate, so all mortgage borrowers get a reduction in payments to make it easier to service all their debt.
Equity in most of the underwater properties is freed up so the homeowners can refinance or sell without short sales. The lenders have their underwater mortgage balances transformed to a healthy position, and they obtain inexpensive liquid capital to fix their balance sheets to boot.
Homeowners who are not in trouble also get equal fair reductions in their mortgage principals and payments also providing even more liquidity to lenders.
The taxpayers end up with good assets on the books, loans to healthy consumers and lenders, instead of loans to banks that are still underwater with their mortgages, or "toxic assets" as is the case with the TARP bailout.
By providing loans to all property owners, not just the ones in trouble, the plan is fair to all homeowners.
By providing equal fair access to the government loans to adult citizens who don't own any residential property the plan is fair to all Americans.
The plan was conceived in early 2008 an originally published in November, 2008, and the value of Housing and Economic Recovery Certificates (HERCs) that assign rights to loans was estimated at $2.1 trillion assuming a 10% drop in property values, loans equalling 80% of the drop, and a total of 98 million residential 1-4 unit properties not including mobile homes to obtain loan rights. However, since the original estimate property values have already dropped considerably more than anticipated. The latest data from the Federal Housing Finance Agency monthly Housing Price Index shows a drop of 10.5% in median home values in the U.S. from their peak until November, 2008. However, the S&P Case-Shiller Index (TM Fiserv, Inc.) of median home values in the 20 largest metropolitan areas, where most of the homes are located, now shows an average drop of median values of almost 20% through November, 2008, and property values have dropped even more since then. In addition, we've revised our estimate of the maximum number of individual residential structures that would qualify to be 115 million instead of 98 million. So we need to update the math to estimate the total value of loans to be issued under the program.
The estimated total value of all 1-4 unit residential properties in the U.S. was about $23.3 trillion at the 2006-2007 peak. Assume that when the HERCs are calculated for issuance the value of properties will be down 20% from their peak, or $18.6 trillion total, a drop of almost $4.7 trillion. We originally proposed using 80% of a 10% drop to calculate the value of HERCs. To control the size of the program, we now think that 60% of the 20% drop would be sufficient, so the total value of property-based HERCs would be $2.8 trillion instead of the $1.5 trillion originally estimated. 60% of a 20% drop in value equals 12% of equity. Below we've estimated that of the $2.8 trillion in total HERC debt authorizations, about $1.9 trillion would be used to pay down mortgage debt, and that's 15.6% of all outstanding residential mortgage debt. That should be sufficient to rescue most underwater mortgages, when you consider that 75% of homes still have mortgage debt less than 100% of the home value, and that housing values will stabilize or increase over the next few years due to the effects of the AllStreets program itself, plus other economic stimulus measures provided by the federal government.
In addition to HERCs issued to property owners, all adult citizens who don't own any residential property get fair access to the government loans in an amount equal to 10% of the median property value in the area they live. Originally we estimated that there are 180 million adult citizens who don't own property out of the 230 million or so adults 18-years of age or older in the U.S. However, we've corrected that estimate to be no more than 120 million. We continue to assume the median property value at the time the HERCs are issued would be no more than about $160,000, and that the median property value can be fairly used to estimate the average value of non-owner HERCs, so we ballpark the average HERC to be $16,000 for every non-owner, with a minimum of $5,000 each. So, the total value of non-owner HERCs comes to $1.92 trillion (120 million people times an average of $16,000).
Adding the value of property-owner HERCs of $2.8 trillion to the value of non-owner HERCs of $1.9 trillion nets a total of $4.7 trillion in loan authorizations. Compare that to the more than $10 trillion that has already been authorized for various government bailout programs (there's currently talk of at least $1 trillion more to be requested by Secretary of the Treasury, Tim Geitner). However, note that not much of the total of $4.7 trillion of AllStreets loans would be additional government lending. Much of the $300 billion or so loans already made to banks from the $700 billion authorized under the TARP program, could be paid back or effectively replaced by the loans in the AllStreets program. The other $350 billion of TARP that hasn't been spent could be devoted to AllStreets loans. Other large portions of the $10+ trillion in government bailouts are just loan guarantees or unspent authorizations that would never be needed as a result of the AllStreets program. Also consider that presumably the program would sufficiently stimulate the economy that government tax receipts would be much larger much sooner than if the program were not implemented, and, therefore, the future costs of interest on government lending would be significantly reduced.
One interesting question to consider is how much mortgage debt would be paid down as a result of AllStreets loans. There is now a total of $12.2 trillion of outstanding residential mortgage debt (per "Freddie Mac Update, January, 2009"). Also, according to Census Bureau data about 33% of residential properties have no mortgage at all. Although it's difficult to precisely estimate how much of the debt would be paid down by The AllStreets loans, we think it's valid to assume that the 33% of properties without mortgages probably have lower than average value, so, at least 67% of the property-owner HERC authorizations would be used to pay down mortgage debt, and 67% of $2.8 trillion equals $1.9 trillion, or at least 15.6% of all residential mortgage debt. That would go a long way toward relieving excess mortgage debt and freeing homeowners to refinance or sell without a loss. It would also significantly reduce mortgage payments since the payments on paid-down principal would be recast under the program.
Recall some other important features and beneficial effects of the AllStreets Bailout Plan:
The loans are issued without any qualification at all to every homeowner to ensure fairness and guarantee effectiveness.
The loan on each property is split equally between the homeowner and the lender, so the bailout is fair to each unlike programs to date that bail out lenders but not the homeowners who will also foot any tax bill.
Payments on remaining mortgage principal are recalculated based on the new principal and the original interest rate, so all mortgage borrowers get a reduction in payments to make it easier to service all their debt.
Equity in most of the underwater properties is freed up so the homeowners can refinance or sell without short sales. The lenders have their underwater mortgage balances transformed to a healthy position, and they obtain inexpensive liquid capital to fix their balance sheets to boot.
Homeowners who are not in trouble also get equal fair reductions in their mortgage principals and payments also providing even more liquidity to lenders.
The taxpayers end up with good assets on the books, loans to healthy consumers and lenders, instead of loans to banks that are still underwater with their mortgages, or "toxic assets" as is the case with the TARP bailout.
By providing loans to all property owners, not just the ones in trouble, the plan is fair to all homeowners.
By providing equal fair access to the government loans to adult citizens who don't own any residential property the plan is fair to all Americans.
Posted by The Mortgage News at 2/14/2009 10:39 AM 
Categories: bank bailout,Housing Values,Credit Crisis,debt crisis,foreclosure crisis,Wall Street bailout,AllStreets Bailout Plan,mortgage delinquencies,government bailouts,TARP funds,mortgage crisis,Mortgage Legislation
Categories: bank bailout,Housing Values,Credit Crisis,debt crisis,foreclosure crisis,Wall Street bailout,AllStreets Bailout Plan,mortgage delinquencies,government bailouts,TARP funds,mortgage crisis,Mortgage Legislation
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