Solution to mortgage mess has its merits

The business owner who gave me my first job welcomed criticism of his shop — as long as you brought a proposed solution to the problem. We’ve tried to instill the same practice with our children. Not only did it reduce the number of gripes our fabulous four shared at the dinner table while growing up, but it also sparked wonderful creativity and conversations.

Ted Jones, chief economist for Stewart Title and former professor at Texas A&M University, is leading a charge to spark more creative thinking about solving the mortgage mess in this country and stopping the whining about shady lenders, greedy investors and clueless consumers.

While Jones and other housing analysts clearly believe that real estate is a regional enterprise, a couple of his proposed solutions could have national appeal.

In order for the housing market to recover, consistent valuation of homes must return and consumers need to feel confident that their purchase will not decline in value.

One offering is to copy a 1980s method used by the Farm Credit Bank in St. Paul, Minn. The Farm Credit bank was facing the same issues on rural land it had foreclosed on as we face today in our housing market. According to Jones, no one wanted to risk buying if they thought that values would decline further. The St. Paul bank then came up with a deal that absolutely took off: Selling foreclosed parcels with a 10 percent down payment financed by a 30-year, fixed-rate loan at 10 percent. (Interest rates had shot higher during the 1980s, prompting the Kelly household to refinance at one point to an 11.9 percent loan).

As long as the owner took care of the property, paid the mortgage, insurance and tax payments, the bank offered to return the down payment to the owners after five years if the property was not worth the original purchase price. If the down payment were returned, nominal rent was to be paid. In the end, the bank did not get any of the properties back — proving that housing was a good long-term investment.

Another example of a creative rebound can be traced to an experience Jones and his wife faced 20 years ago when the savings and loan crisis struck, causing foreclosures in many communities, including College Station, Texas, home of Texas A&M.

A huge real estate auction was scheduled and people came from miles around to participate. The terms of the auction included a 10 percent cash down payment. If you were the winning bidder, you then received a fixed-rate, 30-year fully amortizing loan at 10 percent interest. All transactions costs, including loan origination and title insurance were included.

Jones and his wife previewed an auction home and decided to bid up to $135,000. As a former appraiser, he figured that number was high for a highly depressed market, but the couple did not want to spend the money to build a new house to suit their needs.

The property eventually sold for more than $170,000 — at least $35,000 more than the former appraiser considered high market value. It turned out that the buyer was an individual who had declared bankruptcy. And, even though he was still in business, the buyer could no longer qualify for a mortgage under existing loan-qualifying terms. The tough economic times pushed many prospective buyers to the auction because it allowed buyers to obtain a home with a fixed-rate, fully amortizing loan, as long as they could produce the 10 percent down payment.

It was amazing how creative people could become in collecting the 10 percent to allow them to bid on properties. Jones said one couple even sold a relatively new model car and bought an older one just to become qualified bidders. Given their credit history, the couple saw the auction as a once-in-a-lifetime chance to be able to buy a home.

Let’s take a lesson from history and seriously consider some of Jones’ steps to a potential solution:

Foreclosures can be bought from lenders for 10 percent down — or they can be assumed from current homeowners for the same 10 percent down — provided a closing of the property takes place to clean up legal issues and issue a new loan.

The buyer will be charged an insurance fee when the loan is originated, plus an annual premium to guard against the potential of declining property values. (This is not mortgage insurance but property value insurance). This way the homebuyer — rather than the taxpayer — comes out of pocket to pay for this protection and coverage.

Five years from now the lender will give back the 10 percent down payment (provided wear and tear is normal). If the property value has declined, the owner will be charged a market rent as stipulated in the purchase contract.

After five years of consistent payments, the buyer receives a 30-year fixed-rate loan at prevailing rates with no additional qualifying requirements.

The property cannot be resold or refinanced except by agreement of the lender and U.S. government.

What’s your solution? How would you counter the possibility of two million more foreclosures in the next 18 months?

Tom Kelly’s book “Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com