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Now lets look at some examples.
First a person buying a home with complete exposure to the vageries of the normal real estate market. Call this a naked home purchase. We will talk about P1 and P2 and H1 and H2. The seller pays sales costs. The same bank handles all financing.
Someone owns a home H1 valued at 300,000 and it is completely paid for. The new owner P1 puts down 50,000, and borrows 250,000 from the bank. 5000 is the cost of obtaining the loan (2%) That person now has a mortgage for 255,000
Eight years later the person P1 has to move. Their payments have put in an an additional 10,000 into the home as principle. They move into a very similar house, but houses have now gone up in value. Both houses are now worth 400,000. Sales costs are on the order of 25,000.00 P2 moves into H1 puting down 60,000 and assuming a mortgage of 347,000 that includes 7000 cost of the loan. P1 pays 25,000 in sales costs, 0 in loan costs since the mortgage goes with him and moves into H2. The person who owned H2 gets 400,000 out of which he pays his sales costs.
We have a total of 3 moves. We are ignoring the original owners of the houses. P1 moved twice, and P2 moved once. There were 12,000 in loan costs instead of 19,000 that would have happened if P1 had to take money, then get a new mortgage. P1 took their mortgage which was 240,000 and saw it increase to 265,000. Their equity, which was 60,000, is now 135,000 because of appreciation (100,000) less costs (25,000). Equity + mortgage = 400,000. P1 has paid in 45,000 + 10,000 +5000 = 60,000 Transaction costs to P1 as sales commissions, and financing were 30,000 So P1 paid 30,000 to equity, and 30,000 in costs. Equity + mortgage + costs = 430,000.
Here we are ignoring routine maintenance which over the life of owners and a house will be substantive. New roof, 15,000. New Air, heating exterior painting etc are all non trivial expenses. Most of the time, the above sceanario is valid since housing prices do not usually go down. Still, over a lifetime of 5 moves a person will save on the order of 35,000 or more.
What if prices do go down? Let us reverse this scenario. P1 buys H1 for 400,000 then 8 years later must move but prices have gone down. P1 only put down 60,000 but the house is worth 300,000 as is the house to which he wants to move. What to do? Well, if the mortgage goes with the person, then P1 keeps the mortgage and simply changes houses. Now P1 is still paying on a 340,000 mortgage but on a different house. Actually, because of transaction costs, the mortgage may be 360,000. P1 has no equity in the house since it is only worth 300,000. But P1 had no equity in H1. No equity is no equity. But P1 was able to move to the new job. The mortgage went with him. P2 was able to sell the house and go wherever P2 wanted to go. Thus the idea of a portable mortgage has much upside and little or no downside.
Addendum to mortgage and lending laws. Mortgage insurance shall be done in accordance with the methods used by Lloyds underwriters ---. In order to encourage more judicious practices, liability for mortgage insurance underwriting shall be unlimited.
For the Future: Now let us look at Naked home buying using Normalized Housing Units. In this case we will commoditize the value of houses using the principles of commodities. Units will trade on an exchange but they will be more liquid than what trades currently. See Housing on the Chicago Merchantile Exchange. A mortgage or house can be priced in terms of these units just as they can be priced in terms of gold. While commodities exchanges allow bubbles, they tend to limit their size and duration. Thus a person can purchase NHU's that represent an average over the country, or in a particular area. A mortgage priced in NHU's will have no less than 20% of the national average, and no more than 30% in the price of a particular house. The balance shall be made up of some percentages of particular areas. The values of course will be determined by how those markets trade.
I have yet to work out the details of how this will work, but I think it is clear that using NHU's as the basis for portable mortgages will enable individuals to start saving and acquiring a mortgage earlier by purchasing small pieces. This will also smooth out local fluctuations in prices, while enabling the owner to participate in long term appreciation and reducing risk. Since housing/shelter can also aid in retirement, but retirement is not likely to help with housing/shelter, then an individual housing account can better serve most people starting out in the workforce than IRA.s
For Now: Currently there exists on the order of a million homes in some state of being Bank Owned or in foreclosure. There are another three to four million homeowners who are behind in their payments. Over twenty percent of homeowners that have subprime mortgages are in distress. Numerous proposals are being floated to help resolve this issue. Almost all have serious drawbacks. Among them are:
1. People who made serious errors in judgement, both homeowners and banks, get a free pass. 2. The cost to the government is large, with relatively little likelihood that the money will be recovered 3. There will be a large amount of bureaucrats and red tape involved and the process will be slow and compulsury with little or no choice.
If we use the concept of the pool of real properties (PRP) we can address all of these issues. For one thing, there will be numerous PRP's with various standards and metodologies. They will have interlocking agreements so that individuals will have the greatest variety of homes from which to choose. Other than the PRP's put together to serve the general public, there will be numerous PRP's created to serve large corporate entities who have occasion to move staff frequently, or the military or possibly airlines who might find this a better way to house staff.
Let us examine a possible problem of the changing of relative values of houses in a PRP. Let us assume three houses, one in Cleveland ~ H1, one in Denver ~ H2, and one in LA ~ H3 which have prices of $100, $200 and $400 per square foot respectively, that these prices reflect the average price per square foot of houses in those cities, and that the average price per square foot in the country is about $150 per square foot.
Let us assume that these three houses are different sizes so they are the same price. H1 is 4000 sq ft, H2 is 2000 sq ft, and the one in LA, H3, is only 1000 square feet so that they are all priced at $400,000. Each person buys the house with 20 percent down using a mobile or portable mortgage made up of NHU's structured as follows. 40% based on the national price of $150 per sq ft and 30% each of local prices and the specific price of the house. So a person has a document that says they have 60,000 in value. The three documents N1, N2, and N3 which belong to P1, P2, and P3 who are about to move into H1, H2, and H3 are made up as follows.
The N1 $24000 or 160 sq ft of national housing units at 150 per sq ft $18000 each or 180 sq ft of regional and specific houses so 360 sq ft.
N2 24000 ... 18000 each or 90 sq ft of regional and specific houses so 180 sq ft.
N3 24000 ... 18000 each or 45 sq ft of regional and specific houses so 90 sq ft.
Eight years later and things have changed. Pollution from China, oil spills and rising waters have reduced the value of LA homes to 200 per sq ft, Increased temperature has improved the climate of Cleveland as has the fact that China Inc has set up manufacture of a space elevator and prices are now 300 per sq ft. The national value of homes is 200 per sq ft, and Denver is 250 per sq ft. Payments over 8 years have increased the value of each persons paid in equity from 60,000 to 72,000 or 20%
One of the purposes of the PRP is to smooth out local fluctuations. CHANGE IN Price/sq ft Price
H1 100 --> 300 400,000 1,200,000 H2 200 --> 250 400,000 500,000 H3 400 --> 200 400,000 200,000 Now P1 moves to H2, P2 moves to H3, and P3 moves to H1
See also the table down below
Now let us assume that these three Persons all have the same agreement with the PRP. That is that the PRP participates in 1/2 of the appreciation of each property. In exchange for this participation, the PRP guarantees that when a person moves from one house to another, that if there is some deficit in equity, as when P3 moves to H1, that P3 will make up the lost equity. If a person stays in the PRP for 20 years or dies then their estate will vest with the average value of appreciation of properties in the PRP and will get 70, 80, 90? percent of that appreciation.
So, let us see how the specifics work out.
P1 with 872,000 equity moves to H2 which has a retail value of 500,000. But of the 800,000 in appreciation 400,000 belongs to the PRP, so the new mortgage is only 28,000. This is an extreme situation. No doubt H1 will be both pleased about the appreciation and angry that they did not get it all. But the agreement was that they would not, and next time they may not be so lucky.
P2 moves to H3. This is probably more typical. A person goes from a 1/2 of 100,000 appreciation + 72,000 or 132,000 equity to a house with a price of only 200,000. They move to a larger house, or pay the mortgage off faster. Note that P2 got only 1/2 of 1000 appreciation, but they did not have to pay refinance fees and sales costs which would be in excess of 40,000. So their paper "loss" is really less than 50,000.
In this move P3 benefits the most. In ordinary circumstances they would have lost their equity. But this new system guarantees that they do not loose what they paid in. They were living in a 1000 sq ft property, but can now get a 1333 sq ft property and keep the same mortgage (1333*300 = 400,000) The "deficit" in this instance of moving comes from the "excess" of the first move. That is, the PRP benefited from the appreciation of house1 (H1), and that offsets the 'loss' on house 3
Of course, in all of these moves many tens of thousands of dollars are saved by the individuals in sales costs and refinancing charges. Of the three, only one "looses" in this particular move.
If my system starts now and draws upon the current pools of properties and DXH the corporate owners will be in a better position to set the terms since the DXH will be better off. As others come into the PRP they will have more power and leeway to negotiate their own contracts, deciding how much of the appreciation they wish allow to go to the PRP on any given specific move. More appreciation means lower mortgage payments. Over the long term most people will get most of their appreciation after they leave the system.
=========================================================== The above cases delt with situations that exist in normal times where people will put up a downpayment and have good credit. These are not normal times, and there exist hundreds of thousands, if not millions of homes that are in some state of foreclosure. For almost every such house there is a family that was forced to give up the ownership of that house. By using the above concepts my system can place any such family that has a stable income back into a home, give them back some of their equity, and guarantee stability.
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