Turley Blog

The Turley Plan: Solution to our Current Housing Crisis

By Jeff Turley 10/22/2010

Plan:

Provide incentives for current mortgage holders and accelerate purchases of shadow inventory through 15-20 year amortized loans at lower mortgage interest rates (15 yr- 2% & 20 yr- 2.5%). Thereby, reducing the overall U.S. mortgage debt nearly 30% within 5-7 years and decreasing the overall inventory to 6-8 months, within 24 months.

Example:

· 2.5% - 20yr $200,000 = $1,059 payment/$650 principal per month

After 60 months $158,941 - 20% reduction of debt

· 2% - 15yr $200,000 = $1,287 payment /$954 principal per month

After 60 months $139,872 - 30% reduction of debt

· 6% - 30yr $200,000 = $1,200 payment / $200 principal per month

After 60 months $189,000 - 5% reduction of debt

Offer 15-20 year term amortized loans to borrowers willing to stay in their home for the next 5-7 years; therefore accelerating principle reduction to 30-40% within the 7 year timeline. In addition, it is essential to allow a limited amount of “stated income investors” who have 20-25% down payments to purchase homes.

Goal:

· Eliminate the massive shadow inventory

· Allow 20-25% down payment purchases for investors with accelerated payoffs (20/15 year) – Investment properties at 60% within 60 months (60/60 plan)

· Allow 5-10% down on new owner occupied purchases (No FHA Needed)

· Allow 2^nd home mortgages with 20% down payments

· Eliminate 30% of the national mortgage debt within 7 years

· Give current borrowers a shorter term horizon to eliminate debt

· Allow current mortgage holders, regardless of current mortgage status or credit history

· Eliminate strategic foreclosure as an option for current borrowers

Problem:

The erroneous focus on “lower payments” has been part of the problem. Payments have never been the problem for 95% of borrowers – equity has been the issue. If borrowers have equity then they will not strategically walk away from a property.

Our current mortgage crisis also includes our shadow inventory created by the speculation bubble of 2003-2007. Most politicians, pundits and even lenders have a difficult time realizing the “true speculation bust” we experienced. The speculation was not driven by fraud, as much as the “stated income loans, at high loan to values on investment properties.” We have been attempting to solve the wrong problem with an even worse solution. Our current solution is to create a 30 year refinance boom, which only sets most mortgage holders further behind by stretching their debt over a new 30 year term – essentially going backwards.

In addition, FHA has become the new sub-prime charging fees of nearly $10,000-$15,000 (+3-4%-SRP) just to secure the loans, not withstanding, pushing most mortgage debt back to 30 years again. Payments are not killing the housing market; equity is killing the housing market. Ninety-five percent of primary residences make their payments on time. Consumers do not have a payment problem, but rather a balance sheet problem. Historically the natural foreclosure rate is 2%, therefore there will always be some who cannot make their payments. When most borrowers have the majority of their assets in their home, lowering their payment does not solve the problem.

Shadow Inventory:

Current inventory are homes currently listed; the shadow inventory is the killer:

· Bank owned homes

· Current permitted uncompleted homes

· Homes banks could own if they chose to foreclose, but have not foreclosed

· Current homes ready to be sold once a rebound happens

· Boomers ready to unload investments and 2nd homes

Solution:

Reduce debt through shorter term amortization and the lowest rate possible, which will in turn strengthen the equity, even for those 30% underwater, within 5-7 years.

Banks should offer across the board to all current home buyers and current owners a 20 year fixed rate at 2.5% or a 15 year fixed rate at 2%. These rates should be given all current home owners and homes currently for sale within a permitted period of time – or permit time for new homes to be built. We need to protect against future building taking advantage of this program, as this program specifically targets our current and shadow inventory. A current mortgage holder can reduce their current $200,000 mortgage to $100,000 in 10 years or less. On a $200,000 mortgage the principal reduction is about $650-950 per month. On a home currently underwater, a mortgage reducing 20%-30% of the principal in 60 months creates a view everyone can see. Furthermore, the borrower would have a difficult time renting for less than 2.5% on a 20 year rate.

Critical - Big Idea:

Eliminate shadow inventory quickly by using investors – however this time around the emphasis is debt reduction. Fannie/Freddie can be given to “stated income” investors with 20-25% down and adequate reserves. No hassles. No issue. Limited guidelines. The speed of money is essential at this point in our recession. Limit the rentals a person can own to less than ten. Allow 20% down on a 2.5% rate and the investor will be at 60% loan to value within 60 months – this is key! Anyone with this type of future equity will not strategically walk away from their home.

Investor is the Savior – “Get them in the game”:

Believe it or not the investors are essential to getting us out of this current economic mess. The housing glut was built for speculators (investors) because a large percentage of these homes were built during 2004-2007 for speculators who have been shut out of the recovery. Investor “stated income” loans are not evil loans if used correctly. I would agree, “Interest only, 100%, non-owner, stated income loans” are evil.

Stated income, with twenty percent down with a 2.5% rate on a 20 year fixed is not the enemy at all; it is intelligent. If you allowed investors to have rental properties at 2% or 2.5% then with a 20% investment at 2011 values within 60 months (2016) they would have net 40% equity – without factoring future appreciation. Our shadow inventory can be reduced in 24-48 months – this program would not be offered to newly built homes beyond a certain permit date to protect against future real estate bubbles. The purpose of this program is for current shadow inventory and the elimination of debt. Also, the program is only offered until our surpluses have come back into a healthy 6-8 month timeline.

Paradigm Shift:

Mortgage holders need to be able to see results quickly and 60 months is the psychological key to this paradigm shift.

Here are a few more of the paradigm shifts:

· Come to a clear understanding that we do not have a “payment problem” but rather an equity crisis – 95%-97% of primary residences still make their payments on time

· Borrowers will not be able to rent for the amount of their payment plus equity of their payment, stabilizing the strategic foreclosures issue

· Current investment properties have not been able to take advantage of current lower rates, allow them to be refinanced on this program

· People can see down the road 5-7 years; They need to see a more immediate benefit; 30 years is too far out

· Lower rental rates will help the economy

· Make this loan program easy -- No matter what the credit score or past history, give borrowers this program across the board

· Federal government will net more because the interest write offs will be less

Execution:

Allow all lenders to refinance at a flat rate – roll in simple low cost fees. Twenty year and fifteen year rates are bought down with government funds to get to 2% and 2.5%; or have a bond program set up by the Federal Reserve to purchase those bonds at targeted rates. The government will not lose money on this and will get the money back in approximately 10 years.

· Simple low cost refinances with few guidelines attached

· Appraisals not needed on refinances

· Option Arm and Jumbo loans need to be included

· Allow this loan to be assumed for the purpose of crisis consideration

· Refinances (cash out) and 2^nd mortgages are prohibited for the life of the loan

· Loan has to be held for 5-7 years

· Guideline the mortgage note and deed of trust, not the borrower

· Current investment properties/rentals will be included in program with limited guidelines

· Allow this program to be assumed tax-free for family members

· Current bank inventory needs to be on the market by a set timeline

· 20/15 year fixed on owner occupied homes – ONE TIME ONLY

It is critical to remember – if a borrower is given the option to lower their payment or reduce debt, nine out of ten times they will take the lower payment. It is essential for the 15 and 20 year fixed rate loans to be the only option for this program at these low rates of 2%-2.5%

We must stop considering lower payments as the issue and start believing reduction of debt and the investor as our path to recovery.

Sincerely,

Jeff Turley - President
Resolve Lending, Inc.

jeff@resolvelending.com 425-519-3665