There is a winning strategy for this mess. It's one we know works, its one we lived. I was CEO of an FCS during the 1980's farm crisis. We secured social and political support, in the end helping the most farmers. Here's what we should consider.
Today, the problem is perceived as bailing out fat, arrogant and greedy Wall Street types. While this may be true, the current solution fails to put a personal face on it. The personal face has got to be the troubled homeowner and their home mortgage....and the worried/non delinquent homeowner. The right solution should address the needs of current and non delinquent mortgagees.
We have a crisis of confidence because of arrogance and greed. The first Congressional solution doesn't feel like individuals are protected. Right or wrong...that's how people feel. Unsung heroes which can be part of the solution are the thousands of community based lenders in the United States and the millions of homeowners who simply want to stay and pay.
Here's what we learned from the debt crisis of the 1980's. Farmers had too much debt; regulators stepped in and said fix it. The regulator / treasury provided a 4 billion dollar line of credit...the fix was left to the local institutions. I believe the principles learned provide a "Home Run" solution now.
Framework for solving the current financial crisis.
Principle ...Put a face to the problem. Everyone must be incented for personal accountability which means loan restructures make perfect sense. Help everyone become winners. Define the problem in real terms for the family with a mortgage underwater. Help them. Help those who have paid on time. Here's how.
Any homeowner with Fannie or Freddie with loan under appraised value can be restructured to appraised value. Interest rate may be adjusted modestly upward, e.g. ½ % as a premium for the restructure. It is better to have the existing owner on the property {same as farmers} When the loan is restructured, home owner waives normal foreclosure forbearance period and could provide lender a deed in lieu of foreclosure. In addition, the homeowner agrees to a shared appreciation mortgage in the event property is sold...agreeing to share 75% of the gain back to Treasury, or perhaps the community based lenders who helped service the loans.
Benefit to homeowner...the homeowner stays in their home; they get reduced payments, and are accountable for their role in decision to borrow.
Any homeowner NOT delinquent should be treated fairly. Perhaps, offer all current borrowers an incentive of ½% decrease from existing Fannie or Freddie fixed rate. Critically important is to offer all current 30 yr fixed at ½% below those who have restructured loans.
Benefits to homeowner... individuals are rewarded for paying their mortgages; individuals stay in their home and get reduced payments for their personal accountability. Result of these two strategies has most, if not all of the Fannie and Freddie borrowers engaged as part of the solution. The problem's solution is now owned by all the citizens.
Principle...let government provide the backstop which it does best. Managing the millions of loans is not done best from D.C.
Change Treasury's role to a line of credit ...don't buy the loans...guarantee them so that the losses are covered. This prevents the mark to market write-down which overstates the losses. In about one day, the institution which I was CEO lost virtually all of its net worth because the regulators wrote assets down with a stroke of the pen. In the end, FCS only used about $1billion of the $4 billion Farm Credit bailout. Fear drove farmers, lenders and regulator overstating losses by 75%. Ten years passed before financial recovery occurred for the lender....and nearly 20 years passed before hope was renewed with farmers.
Benefit...Government is limited to oversight, new regulations, and avoids the excessive and illogical write-down.
Principle...put a face to the solution locally. Offer all Fannie Mae and Freddie Mac loan servicing to community based Credit Unions or Community banks less than $500 million in volume. Servicing now has a face...a local face to restructure, collect or service the loans. Keep the loans off balance sheet for the credit unions or community banks. Let community based lenders bid on servicing rights...75 to 200 basis points for servicing the adverse assets. This part of the strategy takes the problem to the folks who know the people and adds a new sense of accountability while using existing lenders as part of the solution. Community based lenders have a choice to participate and strengthen their personal connection in communities.
Benefit...Government sets the rules; problem is decentralized to lenders in the thousands of communities. This instantly includes an existing infrastructure of nearly 15,000 community banks and credit unions to solve the servicing part of the strategy.
Principle...limit excess new bureaucracy. Use existing Office of the Comptroller of the Currency, FDIC and National Credit Union Administration to supervise respective institutions on the managing the Fannie and Freddie loans. These regulators are largely doing a good job.
Benefit...Government uses existing well managed regulators...of course; Treasury with Congress should establish additional regulations...this solution uses all existing resources, personalizes the problem and solution; is simple and could be very efficient and effective. The plan saves Main Street, i.e. individual homeowners in a way which focuses on personal accountability of homeowners and lenders. This is simple...clear...and engages all of our citizens...and has worked before.
The country is starving for ethical and courageous leadership...perhaps "Elegant Courage."
Mike Krutza has completed more than 33 years in executive leadership characterized by innovativeness, courage and persistence.
As a CEO since 1988 he turned a near bankrupt business into one of the strongest financial performers in the industry. His strong sense of strategic vision, integrity and common sense also changed the company culture from despair, confusion and unhappiness to a company described by employees as innovative, respectful and a "great place to work." Mike understands the need to produce business results as well as the ever more important need to create a great culture. He understands the negative effect of ego-driven cultures and the generational differences among people. mikekrutza@lighthouse-leadership.com
Jodi Wiff created the mantra of "Elegant Courage"-- honesty with grace and elegance during good or bad times. Her 28 years as a leader distinguished her special and unique problem solving abilities. Her innovativeness and creativity changed the company culture from ugliness - sniping and lack of hope to a warm, engaging, respectful environment. She believes the employee and customers are special and important to a business and that leaders must create the environment which "feels" hopeful and stirs the inner calling of employees to make a difference. jodiwiff@lighthouse-leadership.com
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