Thursday, March 31, 2011

5-Part Series, Digging Out of America's Foreclosure Mess; Part 4, Socially Conscious Private Investment

Photo Credit - Flickr Common
Many Americans believe there is an ideological war brewing in our nation that pits socialism against capitalism and social justice policy making against constitutional policy making.

Many see government policies that are socially conscious as the government having picked winners and losers in the private business sector.

This extends now even to individual families with newly proposed programs that bail out some troubled homeowners with mortgage write downs making them winners, while other underwater mortgage holders, those who have not had financial hardships making payments and are not in foreclosure, are made losers with this policy by not being eligible for write downs.

It is reasonable to view greedy financial industry capitalists as the original cause of the housing bubble burst which set the Great Recession in motion. They are seen as the politically connected group who were bailed out by taxpayers which then afforded them no real consequences for their sins.

Most financial institutions are now in better shape as millions of taxpayers are now in worse shape due to the devastated economy and record breaking high unemployment. These capitalists are seen as evil and are not necessarily seen as capable of being socially conscious in resolving the foreclosure mess.

Many blame Congress for implementing policy years ago that interfered, in the ideology of social justice, with sound financial industry qualifying standards for housing credit.

Many believe the government’s continued interference into the private sector with the failed Home Affordable Modification Program (HAMP), and now even more proposed new government programs, will not be the answer to digging out of the foreclosure mess.

HAMP was recently acknowledged as having been ineffective and poorly conceived, executed, and managed by the Congressional Oversight Panel.

What if government policy created an environment that put the private sector front and center in solving the problem instead of government and taxpayers in the center?

What if policy rewarded socially conscious private sector solutions instead of presuming only government should and will be socially conscious or must be directly involved to solve problems?

Are there capitalists that will fulfill this role for society as a whole? What if there already are? Is it possible to learn from such an example?

Lender and asset manager Bryan Ganz, CEO of Scudder Bay Capital, LLC is a socially conscious capitalist. Over the last few weeks he has been meeting with several Massachusetts congressmen and staffers including Representative Barney Frank and both Senators Brown and Kerry.

Bryan explains, “We are bringing to their attention the risks we see with the manner in which the government is currently dealing with the foreclosure crisis. In addition, we presented several proposals that we believe would help us work through our current problems.”

The following are excerpts from the white paper Bryan Ganz is presenting.

“The foreclosure crisis is the number one economic issue facing America today. While some may argue job creation should be our top priority, and others may believe stimulating the economy should job one, the simple fact is there can be no meaningful economic recovery as long as the housing market remains dead in the water. Unless and until we deal with the foreclosure crisis, there can be no improvement in the housing market and no sustainable economic recovery.”

“Since the 1950’s, the housing industry has been America’s single most important engine for economic growth. Historically, the housing industry has directly or indirectly accounted for roughly one-fifth of all American jobs and 17% to 18% of GDP.”

“Today, however, the housing market is on life support. Since the peak in 2006, home prices have fallen 27%, wiping out $9.0 trillion in wealth as millions of homes have been lost to foreclosure. Today, with many of these foreclosed homes languishing on the market, the supply of unsold homes in America has ballooned to 3.4 million, representing more than eight months of supply.”

“With plummeting prices and an enormous glut of unsold homes clogging the market, builders are simply not building. New home sales in December fell to a seasonally adjusted rate of just 284,000 which is the lowest level in 47 years. This means that no one is buying the concrete, lumber, glass and steel that goes into building our homes."

"Nor are we buying the sinks and stoves, the pools and patio furniture, or the toilets and TVs that go into filling our homes. We are not hiring the carpenters, electricians, masons, and plumbers needed to build our homes or the brokers, bankers, lawyers, and accountants needed to sell our homes.”

“While it may be tempting to view the foreclosure crisis on a micro level, seeing it as a problem only for those few irresponsible homeowners that foolishly got in over their heads, this is simply not the case. The reality is the foreclosure crisis is a societal problem that keenly affects all of us.”

“The homeowner facing foreclosure has already lost the equity in their home. In reality, they have little left to lose. The rest of us, however, stand to lose substantially more if an additional 10 million foreclosed homes are dumped on an already saturated housing market. Not only would this surely quash the nascent economic recovery now in place, it would destroy trillions of dollars in market value on top of the losses already sustained.”

“While we can argue about the root causes of this crisis, there can be no argument about its potential impact. If another 10 million homes are lost to foreclosure, the effect on the overall economy will be catastrophic. Robert Schiller (of the Case Schiller Index) recently estimated that housing prices could fall as much as another 25%. If this were to happen, Americans would lose another $6.0 trillion of asset value.”

“We all remember from Economics 101 that prices are a function of supply and demand. Due to the insidious nature of foreclosures, when a home is lost to foreclosure it affects both sides of the equation. Not only do the foreclosed homes come on the market, adding to supply, but, based on current lending practices, the foreclosed upon homeowners are effectively barred from the housing market for up to seven years.”

“This reduces the pool of potential buyers and hence reduces demand. With increased supply and reduced demand, housing prices have nowhere to go but down. If we add 5 to 10 million homes to the supply side of the equation, and we remove 5 to 10 million potential buyers from the demand side of the equation, housing prices would remain under extreme pressure for many years.”

“If a homeowner has the financial wherewithal to remain in their home (if their loan were modified to reflect today’s lower value of their home), we must do everything possible to keep these people in their homes and to keep these homes off the market.”

“Conversely, if a homeowner does not have the financial wherewithal to remain in their home (even if their mortgage were to be modified), we must do everything possible to transition these homeowners to more appropriate housing. Only in this way can these homeowners get back on their feet financially, and we can work through the glut of non-performing loans.”

“What is “everything possible? First, the solution does not require an additional dime of taxpayer money beyond what has already been committed. Nor does it require new and complicated federal programs. Rather it requires only common sense and a little arm twisting in order to get the various federal agencies to do their jobs and to work in concert to resolve the current crisis.”

“I formed Scudder Bay Capital, LLC 2 years ago with my wife (a consummate do-gooder) to help resolve the mortgage crisis in New England. We wanted to be a part of the solution. Our strategy was simple.”

“We would buy non-performing loans and then work closely with homeowners in a socially responsible manner to help them stay in their home when possible. Or we would work with homeowners to transition to more appropriate housing, and to get back on their feet financially, when it was not possible for them to stay in their home.”

“The first order of business would be to determine which homeowners could afford to make their mortgage payments if their loan were modified or refinanced to reflect the current value of their homes and which homeowners could not.”

“For those homeowners that could afford to stay in their homes, our plan was to either modify their loan or allow them to refinance at a significant discount to the unpaid principal balance and arrearages on their existing loan.”

“By reducing the principal balance and forgiving the arrearages, we hoped to create at least 5% equity value in their home. This helps the homeowner get back on their feet financially and provides them with an incentive to remain current on their mortgage.”

“For those homeowners that could not afford to stay in their home, our plan was to provide financial assistance to allow these homeowners to transition to more affordable housing which is often a rental property. The deficiency balance would be forgiven, and all past due payments would be waived. This allows them to get out from under their crushing debt load and to move on with their lives.”

“In addition, we would provide cash assistance, relocation services, and credit counseling services to ensure a smooth transition. Once the family was relocated, we would sell the home on the open market to a more qualified buyer that could afford the payments. In this way, not only could we help the homeowner start over, we could turn a non-productive asset into a productive asset.”

Bryan and Susan Ganz of Scudder Bay Capital, LLC are working within the American private sector capitalist system to help Americans who are facing the loss of their homes. Their work is also helping Americans who are facing further home value loss due to more foreclosures causing downward pricing pressure on the real estate market as a whole.

They are sound private sector investors who are willing to look at each homeowner individually with compassion while maintaining financial realism. They are an example that capitalists are not all void of social conscious.

In Part 5, we conclude the series with Bryan Ganz’ personal experience as a lender and asset manager in working directly with and helping homeowners in foreclosure.

Bryan knows what government regulations hinder progress and what changes need to be made to allow the private sector to be an asset in digging out of America’s foreclosure mess. He is talking to Washington politicians, and hopefully they are listening.

Visit tomorrow for Part 5, Working Investor Solution.

Part 1 - Prolonged Pain

Part 2 - Failed Government Intervention

Part 3 – New Government Programs

Part 5 – Working Investor Solution

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