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Creative deal structure–could it solve the housing crisis?

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One of the most essential negotiating skills is the ability to divide up the risk, reward, blame, and credit properly among the parties in a negotiation. One of the reasons many people are so outraged at the financial collapse brought about by the real estate bubble is that they (correctly) notice that the risk, rewards, blame, and credit were largely divided up in ways that people found unfair.

Many of the proposed solutions also leave a bad taste in people’s mouths. There is the sense that any solution should divide up both the pain and the responsibility for getting real estate back on its feet.

I recently met a remarkable woman, Kelle Sparta, of http://www.spartasuccess.com, who has been a real estate expert for years. She wrote an open letter to President Obama in which she laid out a plan for solving the housing crisis that, indeed, divides up the risks and rewards among all the players who made bad decisions in the first place.

Here is a copy of her letter. It isn’t a quick and easy read. Understanding her solution takes some concentration. It’s well worth it, however. Not only as a specific proposal to solve the housing crisis, but more importantly for our purposes, as an example of how deftly she has structured the solution so everyone involved—the banks, the homeowners, and the government—shares some of the costs and participates in the rewards.

Enjoy!
– Stever

Dear President Obama,

I recently received an email as part of a mailing to the leadership in the real estate industry asking us to consider how to solve the problems of the current housing crisis.

How To Solve The Current Housing Crisis

I spent several weeks chewing on the thought. What would I say to you if you were to ask me how to solve this current crisis? I had mixed feelings on it. What it came down to for me is this: it’s not about saving the banks from bad investments, and it’s not about digging borrowers out of holes that they got themselves into. As a benevolent parent, the governments’ job is to stave off the catastrophic results the housing downturn is having on the economy as a whole and bring it down to just enough pain that we don’t do something this stupid again. At the same time, the government has to remember that not everyone is in the same situation and you have to be responsible to those who were not caught up in this buying frenzy as well. So, with that in mind, here is my thought.

Buy The Land Under The Houses

In most markets, we have fee simple land ownership that conveys with the house. On every street card, there is a value placed on the land and one on the building. If we’re going to bail people out and make things more affordable, then let’s do it by reducing the principle owed on the property without asking the bank to take a hard hit and without the owners losing their houses. The deal works like this:

  • The banks would have to forgive all late fees and rewrite the loans at no cost (after all, they are getting the benefit of not having to foreclose on a bad loan). They also have to agree to continue to collect the taxes on the land from the homeowner and pay them with the taxes on the home.

  • The government issues bonds to investors to raise the capital and then buys the land at current appraised market value.

  • The homeowner gets a deeded option to repurchase the land at a later date at the original price paid by the government or current market value – whichever is greater.

  • The money paid by the government would go to the bank to pay down the principal balance of the loan, allowing the bank to convert an impaired asset into a performing asset which boosts the bank’s asset rate and lessens reserve requirements, strengthening its balance sheet. This makes the bank more stable, reduces the stress on government resources, and ultimately increases the availability of funds for consumer loans.

  • The homeowners would then get a new loan issued by the bank for the lower principal amount and have to pay a reasonable monthly lease (1% per year) on the land. The homeowner would also still be responsible for paying the taxes on both the land and the home.

  • The bonds issued by the government for the purchase of the land would be backed by the land with dividends provided by the lease payments.

Here’s how it would work in an example case: Harry Homeowner has a house that he is behind on his payments on. He is in danger of foreclosure. The bank has charged him hundreds of dollars in late fees and there is no way he’s going to get on top of things again. What he needs is a fresh start.

Harry’s loan is for $300,000, but the property is only valued at $225,000 in the current market and he can’t sell it. The government offers to buy the land under Harry’s house. The land is valued at $85,000. Harry sells the land to the government and pays down his loan to the bank, leaving a balance of $215,000. The bank agrees to forgive the late fees and rewrite the note. It issues a new loan to Harry on the house only in the amount of $215,000 at a lower interest rate taking Harry’s principle and interest payment from his previous payment of $1871.61 at 6.375% down to a new payment amount of $1073.46 at 4.375%. Harry pays an additional $70.84 per month (1% per year of the purchase price of the land) in addition to his mortgage to cover the lease costs on the land. This makes Harry’s total monthly payment (not including taxes and insurance) $1143.51, saving him $728.81 per month. This savings allows Harry to keep his home and the bank to avoid foreclosure.

Ten years pass and Harry wants to sell his home. He puts the house on the market and finds a buyer who agrees to pay $350,000. Harry then exercises his option to repurchase the land from the government. Current appraised value for the land is $110,000. Harry’s attorney does a simultaneous closing on the property, with Harry purchasing the land back from the government for $110,000 and conveying the house and the land to the new owner for $350,000. The bank gets its loan of $215,000 paid off, the government gets the $110,000 and Harry Homeowner gets the balance of $25,000 (less closing costs).

The Results

Win: The bank didn’t foreclose and got the full amount of its loan repaid.

Win: Harry didn’t lose his house to foreclosure, saved his credit and came out the other end with a little money in his pocket.

Win: As an investment for the taxpayers and bond holders, the $85,000 has matured into $110,000, for a $25,000 increase. In addition, the government has also received interest in the form of lease payments on the land in the amount of 1% or $850 per year. Over ten years, this totals an additional return of $8500 for a total profit of $33,500, an ROI of 3.38% per year which is a better return than the 10 year Treasury Bond rate which was 2.77 as of close of business Friday last week. (Obviously, this is a little more complicated than this, but you get the idea.)

What Happens If Harry Homeowner Still Forecloses? In many areas, affordable housing is a big issue. It’s all local towns and municipalities can do to get developers to include affordable units in their developments. Those towns could change their local regulations to state that the affordable housing unit doesn’t have to be in the development itself – it can be provided in the same town but in a different location within that town. This would make developers tremendously motivated to buy any of the properties served under this plan that go to foreclosure since they would cost the homeowner up to a third less than the local area prices. Even if the builder had to take a loss on the purchase and resale of the home to get the monthly payments into the “affordable” level, it will likely be less than the gain of an extra new unit selling for full price. It’s a good trade.

The Sparta Plan Has Several Benefits

  • It will reduce the principle of the loans for the current homeowners allowing them a payment level they can afford to sustain.

  • Banks only have to eat the cost of refinancing the loans at a lower interest rate and forgiving the late fees, not the cost of foreclosing and reselling.

  • The payments from the land purchases to the banks would allow them to convert impaired assets into performing assets. This boosts the banks’ asset rates and lessens their reserve requirements, strengthening their balance sheets. This makes the banks more stable, reduces the stress on government resources, and ultimately increases the availability of funds for consumer loans. Freeing up additional funds for new loans and opening up credit lines for new spending would be a boon for the economy overall.

  • Property values won’t suffer as a result of the plan since any subsequent purchase of the property would be made including the land when the current seller exercises his/her option to purchase the land back prior to conveying it with the property.

  • It’s a purchase backed by real estate, which means it’s not going to contribute to the deflation of the dollar.

  • It provides a stable investment for older investors who need some way to hedge their bets in this uncertain economy.

  • For the purchases that don’t get paid for by bonds, the tax payers will see a return on their investment as the economy recovers and property values improve. At the very least, we are guaranteed to get our money back with the land lease payments as interest. At the best, the appreciation and the land lease costs will provide a tidy profit for the use of taxpayer monies.

  • It’s not a free ride for anyone. The banks lose out on the refinance and late fees as well as taking only a slightly more than break-even interest rate. The homeowners lose out on the appreciation of their land and have to pay conveyance taxes and closing costs on the land multiple times. In short – those who made bad decisions get a chance to pay for those bad decisions without being destroyed by them.

So, that’s the crux of the idea, Mr. President. It seems to me that it would work. I’d welcome the opportunity to discuss it with you. I also have some ideas on how to make it easier to be self-employed if you’re interested.

Sincerely,

Kelle Sparta
Author of The Consultative Real Estate Agent 
National Speaker, Trainer and Coach for the Real Estate Industry

Are people good or bad? It’s literally a self-fulfilling expectation.

I’ve noticed that underlying a lot of political discussions is a fundamental belief about human nature. Some people believe people are fundamentally self-interested. They won’t work unless paid, and helping the downtrodden is something one does to impress one’s friends. The other side believes people are fundamentally generous. They help each other and will sacrifice their own good for the sake of others.

My recent theory is that both of these viewpoints are true. Literally, they’re both true. There are psychological mechanisms that make each of these a self-fulfilling prophecy.

Self-interest usually manifests in turning everything into a transaction, monetizing as much as possible, and tracking things closely. It turns out that when you introduce money into a conversation or transaction, literally the brain areas involved in altruism, helping, and asking for help all shut down. So if you expect everyone to treat you as if they only want transactions from you, you’ll mention money or exchanges or act in ways you would act when putting together a transaction. Those actions will then actually trigger the same impulse in others. You mention money and the people you’re dealing with become more self-interested and less likely to be collaborative. So a world view where everyone looks out for themselves and everyone is greedy becomes self-fulfilling to the person who holds it.

Similarly, the social psychology reciprocity principle shows that when you give a gift that someone perceives as freely given, they feel obliged to respond by giving back, often in greater amounts than the original gift. So giving provides a self-fulfilling mechanism such that the person who gives freely and believes others are generous will trigger exactly those impulses in others.

What’s important to note is that this isn’t just psychological blinders, where both people interpret the same events differently. This is literally a self-fulfilling principle that plays out in behavior. If you act as if people are greedy, you’ll do things that prime their greedy impulses. If you act as if people are generous and worthy of help, you’ll actually activate reciprocal behavior on their part.

Be careful the world you wish for. You just might get it.

Why do we feel so economically squeezed?

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Last night I wandered into a bookstore by mistake and ended up sitting through a fascinating talk by economist Jared Bernstein. He was discussing the economic trends that have us feeling overworked, underpaid, and anything but upwardly mobile. Unlike most economists, though, he could speak plain English and made his points accessibel and understandable.

So I bought his new book “Crunch.” I’m halfway through it and it’s a fun, educational read. It teaches a lot about how money is currently flowing and why it’s flowing that way.

Though heavily researched and footnoted, this is written as a popular book. I would have preferred to see more in-text mentions of sources, but he doesn’t do that. The text presents only conclusions and observations, and reference-following geeks like me must read the bibliography and footnotes to dig deeper into his sources.

His fundamental thesis: absurdly rising income inequality of the last 30 years (especially the last 10) have allocated virtually all productivity improvement gains to a very small group of people. Everyone else has been subject to foreign wage competition,  increasing productivity (which means fewer  jobs needed), etc. His claim is that we’ve reached a point where social mobility is also structurally constricted because education and opportunities are linked to wealth given college costs rising at 3x inflation for 15 years, etc.

Check it out. His ideas may surprise you. Link to the book: http://r.steverrobbins.com/crunchbook

Who’s surprised by compact car sales? Spotting trends. In advance.

The New York Times reported that sales of smaller compacts and subcompacts are on the rise, now that we’re in a gas crunch. Industry analysts (who are young enough that they don’t remember the 70s) are calling this “a first.”

I tried to tell a friend that we’ve had cars that got 50-60 mpg for at least 30 years. When I was a teenager buying my first car, in the middle of the gas crisis of the 1970s, I was looking at a Honda Civic that was rated at over 50 mpg city. Once the oil shock was over, we went right back to huge, hulking contraptions that get gallons-per-mile instead of miles-per-gallon.

Is there anyone who didn’t see this coming? If so, you’ve never had a milkshake through a straw.

When you’re drinking a milkshake, you’re drinking faster than the milkshake can be replenished. Eventually, no matter what, you’ll get to the end of the milkshake and start slurping noisily. Sadness and despair, no more milkshake. If you knew how fast you were sipping and how much the cup held, you could predict exactly when you’d run out of tasty dairy mouth treat.

The story with oil is a bit more complicated. We don’t know how big the cup is, so we don’t know when we’ll hit bottom. And while one problem is how big the cup is, another problem is that more and more people are trying to suck on the straw at once, and we haven’t known how fast they would all start wanting some of our milkshake. (Warning: metaphor breakdown imminent.)

But the trend is utterly, completely, unambigiously predictable.

Because we don’t know the specific numbers, we can’t predict when oil will become expensive. But we know that it will, and there’s simply no doubt about it. If you jump off the top of a building, you’ll fall. How long you’ll fall depends on the height of the building. If you jump from a very tall building, you might even have enough time to pretend that the ride will go on forever. But eventually, you’ll land. That’s pretty much guaranteed. And you might even survive the landing (heck, Michael Holmes fell from 12,000+ feet without a chute and survived). It seems like a pretty stupid thing to do on purpose, though.

The sub-prime banking crisis was also predictable. All these analysts saying no one could have predicted it should be out of a job. The trends were obvious in a single news article last year. I—a non-finance guy—even blogged about it.

Warren Buffett and Charlie Munger have been watching the rise of complex financial derivatives for years, noting that their accounting conventions allow people to get rich when there’s actually nothing supporting the underlying assets. They’re pretty sure (and I agree) that the derivatives market is headed for a meltdown. We can’t predict when, but we can predict that markets are very good at eventually bringing assets back down to their underlying value.

Humans seem hell-bent on believing what we want to believe and ignoring unambiguous trends until they actually become crisis. There’s a whole field called “system dynamics” that deals with the behavior of complex systems, and more importantly, with the ways people seem to be hard-wired to misunderstand complex systems.

We’re living in an era of complex systems. Growth (and melting ice caps) happens faster than we project. Every year. On the surface, it appears things change, but the underlying trends are remarkably constant.

What are the trends you can predict now, but don’t want to? What are the underlying forces shaping your industry, country, or family that will come home to roost? You may not be able to predict specifics of when, where, or how, but you can predict with near-certainty that they will. And when they do, life will be … interesting.

Some interesting trends with highly uncertain timing, and highly certain momentum:

  • The interest payments on the national debt will continue to grow as a percentage of the national budget. (Think: compounding interest on variable rate loans.)
  • Wealth will continue to concentrate in the hands of a small number of people. (With the tax rate on capital gains less than the tax rate on income, even if everyone makes 10% more each year, the rich will get taxed at a lower rate and keep a greater percentage of the overall pie.
  • We’ll have increasing demand for energy of all forms. (Whether or not our total supply will increase at the same rate or faster seems to be unknown.)
  • We have a generation of people in our workforce pipeline of whom somewhere between a quarter and 40% don’t even have a high school diploma. There are serious societal implications there…
  • Precious and non-precious metals are being steadily mined at a rate greater than the rate at which they’re replaced. (For example, Copper may be finished in 61 years, within the lifetime of some of you reading this article.)

So go out and buy a subcompact. And while you’re planning for retirement, consider that the world may be very different then than it is now. Those differences will be driven by our actions today (and our actions of the last 40 years, when it comes to climate change). Are you taking action today that will set up the trends you want in your old age?

Science has worked so well that superstition now reigns supreme

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I grew up in the era of the Apollo moon launches. One of my earliest memories is traveling to Cape Canaveral and watching from the beach as one of the missions was launched towards the moon. It was pretty incredible.

Despite frequent moves and attending six schools between elementary school and college, science was in the air. I got a firm grounding in how to think critically, how to use data, and how to observe the physical world around me in pursuit of Doing Great Things. Whether my school was in a failing Pennsylvania steel town or in a full-on major city, science was present.

Science has given us great things. And therein lies the problem.
read more…

Using Twitter as a research tool! Follow me…

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What a great idea! Twitter is a little one-to-many text messaging tool. I can send out a text message to Twitter, and everyone who has elected to “follow” me gets the message. The intent of Twitter is that you send out a message answering the question, “what are you doing right now?”

Initially, it was fun. I followed some friends from college and this oh-so-mundane peek into the trivia of their lives sparked several impromptu phone conversations (“Waiting in line and can’t decide which movie to see? I’ll call him and suggest something!”) We’ve reconnected and it’s been wonderful.

Grammar Girl has a gazillion followers. She uses her Twitter friends as a resource for examples, research, etc. She sends out occasional “here’s what I’m doing” tweets, and then she sends out, “Has anyone every been confused by a sign that used quote marks?” and voila–she has a dozen examples for her book.

Since I’m starting on the Get-it-Done Guy book, I’ve decided to start Twittering as a research and outreach tool. Furthermore, I’ll be creating a new BLOG where I post ideas, sample chapters, and questions for my community to share ideas with me.

I’d love to invite you to be part of my Twitter group. Simple text “follow GetItDoneGuy” to 40404, or go to my Twitter page and follow me. I’ll send along my BLOG URL once I have it, as well. We’ll see how this works. It could make collaborative book writing a great way to synthesize, craft, and polish ideas!

More social networking?

My goodness. Now “Plaxo Pulse” wants me, and it insists on updating me daily that my friends and acquaintances added each other as friends, or poked someone, or whatever verbs Plaxo monitors. All I know is that if all these people actually picked up the phone to call each other instead of mucking around with Plaxo, they might actually have a real life. I continue to be utterly confused as to what the benefit of these sites are. In all my time on MyspaceFacebookLinkedInEtc., I’ve certainly reconnected with a couple of people and exchanged a few emails. At the cost of hours and days of time. If I’d spent that same time simply browsing my address book and picking up the phone, I would have reconnected with dozens of people.  (Who would then add me to their Friends list on Facebook. Hmm…)

Please, gentle readers, tell me what value you get from these sites. I must be missing something, I just don’t know what! (That’s why I’m missing it…)

Overload is built in to our economy. Poor us.

A post popped up on Inspiration Nation  discussing the article on Overwhelm I wrote in 2005. If you haven’t tried it, I also created a free companion email overload assessment to figure out how many sushi dinners worth of time you’re sacrificing to the Great Gods of Email Overlaod.

The overload situation hasn’t improved since I wrote the article. The 40-hour workweek is widely considered to be a thing of the past. Corporate profits continue to reach all-time highs, so we’re definitely making more money. But so what? Wages are flat or, if you adjust for inflation and higher energy prices, falling. Why does a “good economy” matter if we have to give up our free time and relationships for a falling standard of living? The outgoing MBA graduates I occasionally coach assume they’ll have no life in their pursuit of … the good life?

I’m very puzzled. I’m puzzled that we’ve been so thoroughly trained to confuse buying stuff with happiness (and the two just don’t equate). I’m puzzled we believe it makes sense to give up time with friends and family so we can earn enough to … take time off and spend it with friends and family. And I’m puzzled that even when we are being more productive, we aren’t more outraged that the benefits of that productivity are accruing to people who already have so much money they can’t possibly use any more.

It’s puzzling. And it’s a world we’ve made for ourselves. And if we want change, we’ll have to change it ourselves.

I think it’s a natural progression of our underlying economic system. Our success measures are all growth measures: economic growth, profitability growth, productivity growth. As long as we require yearly growth, it has to come from somewhere. We must get more productive to have productivity growth, and corporations must retain a greater percentage of that gain each year to produce profit growth. That means cutting back on little expenses like healthcare or payroll.

There’s nothing wrong with a nice, stable business that makes a consistent profit year after year, but somehow, we’ve decided that’s not enough. Which is a shame, because thanks to our imperative of growth, many of us have less and less of a life each year.

How can we spend more time as our ‘heroic selves’?

Every year, I staff Otherworld, a yearly adventure weekend that lets participants spend a weekend adventuring as their “heroic selves.” As a participant, Otherworld was one of my funnest weekends ever. As a staff member, it’s been fantastic as well.

This year, I was a “Companion.” I traveled with a group of adventurers, making sure they didn’t fall off a cliff, supplying power bars when needed, etc.

By the end of the weekend, I was beaming with pride for my group. Whenever they came across a group having a challenge, be it combat, a locked treasure chest, or not having enough Royals to pay for lunch, they leapt to the rescue. It’s not required by the adventure, nor is it rewarded.

It struck me afterwards at how powerful it was, watching a group that were genuinely living with a heroic, generous spirit, while still keeping to their own quest and taking care of themselves. I see this so very, very rarely in my daily life. It seems like our culture is one of “take care of #1.” Sure, we provide a market economy and some resources to do it, but there’s really no sense of “we’re in this together.”

Spending a weekend with my group’s heroic selves really inspired mine.

In real life, my current heroic venture is helping to mentor a Junior Achievement group of high school students in creating and running a business. It’s a 2-hour commitment, once a week, for 12 weeks.  By the time I’m done I will have spent a whole day (24 hours) this year being heroic. That’s about 1/4% of my time spent heroicly.

How much of your time do you get to spend as your heroic self? Any ideas for how to increase that number?

The Eleventh Commandment: Thou Shalt Kill

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Amazing. Utterly amazing.

The New York Times is reporting that Churches are now attracting teenagers to the church by having “Halo” nights. That’s when teenage boys get together and play a videogame that’s rated “M” for mature (which means teenagers can’t purchase it without a parent’s permission).

First of all, isn’t there a commandment about “Honoring Thy Father and Thy Mother?” Shouldn’t the churches require parental permission? Remember the bum standing outside the liquor store, buying alcohol for teenagers in return for a few bucks. This time it’s the church buying violent videogames. This does not sound wholesome.

(Of course, we just came off the Catholic-Church-as-teenage-sex-ring scandal, so I’m not sure we should be surprised.)

But let’s say it’s fine for the church to override parental wishes, since they have a direct line to God and the parents, presumably, do not.

They say it’s harmless fun. They must not know how to use Google. It took me less than 30 seconds to visit the American Psychological Association’s web site and look at the 2005 survey of 20 years’ worth of videogame studies. Playing violent videogames heightens aggression, both short-term and long-term.

Now I wasn’t raised in a Judeo-Christian household, so I don’t know the Bible in great detail. But an Orson Wells special on Nostradamus I saw as a kid outlined Armageddon in brief terms (and without attending Bible study classes, it’ll have to do). One of the highlights was when people acting in the name of God and the Church began doing the devil’s work, all the while believing they were doing God’s work.

I would say luring teenagers to Church by exposing them to non-parentally-approved games that are known to increase violent behavior just might fit the bill.