Friday, January 06, 2006

3/5 a Home for 3/5 a Man? The "Big Government Fix-It Plan" for New Orleans

If one were snarky, one could call Rep. Richard Baker's proposal for federal aid in rebuilding New Orleans the "3/5 of a Home for 3/5 of a Man Plan", given the dollars and the demographic. Certainly, the plan is already generating outrage for those reasons.

Yet there is a reason that some progressive lawmakers (like Bernie Sanders) are for the Baker plan, and it behooves those opposing it to articulate why in a meaningful way. It will all come down to whether the math results in Katrina victims getting a truly fair shake with a 60% plan. I've not yet read the exact plan, and its' too early for meaningful analysis to have been done, but both are required before one can say whether the Baker plan will allow Katrina displacees a meaningful chance to start over, or whether it is the racial cleansing nightmare that it appears on the surface to be.

Unfortunately, the press hasn't reported enough enough information yet. Such as the average value of a home pre-Katrina. Here's an example of why that matters: If a home was worth $250,000 pre-Katrina and had a $100,000 mortgage remaining on it (likely with long-term homeowners, less likely with newer homeowners), then at the time of Katrina, the homeowner had $150,000 in equity in her home, and the bank had a $100K interest in it. Thus, under the Baker proposal the lender would get $60,000, the homeowner would get $90,000, and the property would be sold to developers, who would then take whatever profits the market would generate upon rebuild and resale. Under this scenario, the homeowner would take a $60K loss of equity, the mortgage company a $40,000 loss in their note and the subsequent developer gets whatever it gets after repaying its bond costs (since this whole idea turns on floating development bonds.)

On it's face that type of arrangement seems fair or unfair, depending on your personal view about who should bear the loss: banks and investors, or individual homeowners. IMO, the risks should fall more heavily to the financial industry side, since this program would not be proposed at all by Rep. Baker (a known free-market advocate) if folks did not have a potential to make a killing. Using the hypothetical above, the mortgage lender can readily absorb $40K with no pain at all, whereas the homeowner likely can't absorb a permanent $60K hit to their primary (if not only) source of personal wealth/savings. Factoring in the fact that intact home prices skyrocketed in both New Orleans and neighboring areas post-Katrina, such a division of wealth loss may well make it insurmountably harder for a Katrina victim to re-purchase, re-settle, and financially recover long-term.

On the other hand, if at present a homeowner has no insurance at all, they are likely to get nothing, because all mortgages and deeds place 100% of the risk of casualty loss on the homeowner's side of the ledger. Under that scenario, a homeowner receiving 60% of pre-loss value is potentiallly a good financial deal.

The reason is because the Baker plan kicks in only for those homeowners who did not otherwise have insurance coverage absorbing their losses. Since without insurance, 100% of property devaluation normally falls to the homeowner's side of the ledger, the person whose property was wiped out is left with devalued/worthless property and yet still owes the full mortgage. If that is actually true in the circumstances faced by most Katrina homeowners, then acceptance 60% of pre-Katrina equity could be a good deal financially for those who truly cannot otherwise afford to rebuild.

BUT that is true only if the mortgage company taking this deal surrenders its deed of trust and there is no ability to pursue the homeowner for the deficiency created when the lender receives only 60% of the amount owed to it. Since Louisiana allows lenders to pursue deficiency balances following non-judicial foreclosure or other non-judicial collection activity on a mortgage, and since the greedy, grasping subprime mortgage industry has a major foothold in the New Orleans African-American community, a homeowner could be faced with having to absorb all of the other 40% of mortgage to protect his credit, other assets and future income. which would otherwise eat into the homeowner's share of the proceeds and (b) there is no other source of insurance for the mortgage company, such that the lender is not recovering double-payment on the loss.


BUT (there is always a but) to actually know, one has to also know another piece of information that we don't presently know: the amount of "forced placed" insurance coverage benefitting lenders with mortgages on homes destroyed by Katrina. For those who don't know, all deeds of trust permit a lender to buy it's own, ridiculously expensive, casualty insurance coverage to cover loss of their mortgage value if the homeowner fails to carry insurance. It tends to get placed when a homeowner's primary homeowners insurance policy lapses and the homeowner doesn't replace it (usually for affordability reasons.) Forced placed insurance is not only usuriously priced, but benefits only the lender even as the full cost is passed through to the homeowner through an increased mortgage payment. Given this, I would be very surprised if the mortgage holders did not have some insurance source that covered at least a part of their losses. For the Baker plan to be equitable, therefore, it would need to reduce the lender's recovery by that amount which it can recover from insurance -- or at a minimum, allow the insurance to be subrogated (transfer of the right to collect on the insurance policy) back to the city, state or even bond market , so that the overall cost of the plan can be reduced and more homeowners helped.

Defenders of this plan are already claiming that it is a good idea with such shibboleths (such as one I saw actually spouted on DailyKOS, confirming that liberals can be as ignorant as conservatives, sometimes) as the claim that "most folks" benefitting from the Baker Plan would have had no home equity because only "conservative folks" do. That's simply not true as a general proposition. Home equity is tied to length of ownership as much as it is the amount of debt used to acquire the property. While we don't know what percentage of homeowners were short-, as opposed to long-term property owners, we do know that the longer a property owner has his property, the higher the odds that he has higher equity (since mortgage payments, almost never interest-only, have been made for a lot longer.) It's just silly to accept or reject the Baker plan on stereotypes about who homeowners in New Orleans tended to be.

But the two initial concerns I just wrote about are generally beneath the radar for anyone that doesn't work with real estate and mortgage lending. They are the sneaky type of deal that most folks who will take a position on don't think through, because they have no idea they are issues. However, both are a key reason I am at least for reserving final judgment on the Baker plan, even as it has real possibility, because it has the potential of creating a windfall for lenders at the expense of the homeowners, the persons least able to absorb the financial loss. The very people we're supposedly trying to benefit.

We need data. Let's see if it will be forthcoming.