Why the Feds Rescue Banks, Not Homeowners

Why the Feds Rescue Banks, Not Homeowner's

Is everyone so over-educated as not to be able to see the simple truth? Or is it just a matter of greed and self gratification. I hope that it isnt the first and am pretty certain that it is the second. As to someone figuring out a program that will not only work but will help the little guy, I personally know that there are at least 50 congressional leaders and both party's presidential candidates that have already had a program that has been submitted to them and no one is acting upon it.

Everyone either keeps promoting the trickle down theory or gripes about giveaways. Neither one is necessary or wise. Instead, perhaps someone would care to look at the flow through method. Dont give money away to anyone. Dont buy stock, dont buy mortgages. Yes, there have been many mortgages written that were either silly or just down right criminally stupid. Be that as it may (look into it later), solve the problem now. Direct lend to homeowners out of the 700 million. Let them pay off the banks (gets bad debts of the books AND frees up capital). Gets troubled and perhaps not so troubled mortgages back in reach of the consumer. Government charges 20 percent simple interest, front loaded like a standard mortgage (thats 140 Billion dollars profit in 2 years time).

Let the IRS administer and collect the payments (they have offices in all 50 states and are in position to administer the program better than any other agency) as well as their ability to track potential defaulters. Even the most honest person cringes somewhat when they are contacted by the IRS. Will there still be defaults, probably, but not 140 billion dollars worth.

Thats just a thumbnail, but no one that I have sent emails to in the government has been interested enough to want more information. Guess their advisers are too smart to figure it all out.

Timetable: 90 days or less from implementation. Credit crisis: for the consumer its fixed, for the big money boys on wall street, well they will take a small nip on the backside until they get with the program.

j. albright of IN @ Oct 29, 2008 16:23:27 PM

A Way Out

To repair our economy, we need a solution that interrupts the vicious cycle of foreclosures and dropping housing prices. And this solution must avoid the the moral hazard of rewarding or encouraging irresponsible behavior on the part of borrowers and investors. One such idea would be to encourage mortgage lenders to renegotiate the mortgages of borrowers who are close to foreclosure, and to exchange some of the mortgage debt for a partial equity position in the property. Here is an example to make this concept clearer:

Assume a borrower owes $300,000 on a home that is now worth $210,000. The borrower is in a 6.5% variable rate mortgage that may continue to reset to a higher interest rate, and he is having difficulty meeting his current monthly payment of $1,896 plus insurance and property tax. If the lender forecloses, the borrower is left homeless, and the lender will incur a loss of roughly $150,000. That is because the lender will end up taking possession of a home now worth $210,000 and he will have to carry the cost of that home until he can sell it. He will also incur the legal and sales costs of foreclosing, maintaining, and selling the house during one of the toughest real estate markets in recent memory. As thousands of similar homes come on the market, they will further drive down housing prices extending the losses and pushing more homeowners into foreclosure.

My proposed solution is for the lender to take an equity stake in the house. From a financial reporting perspective, the lender is exchanging one asset (a loan) for another (a partial ownership position in a physical property). I believe that the lender will not have to recognize much of an accounting loss as a result of this exchange. Using my example, assume the bank re-finances the old loan into a fixed rate loan at an amount that is affordable to the homeowner, say $200,000. In exchange, the lender receives a 30% ownership share of the house because the lender is absorbing $100,000 or 30% of the original debt. As a partial owner, the lender would participate in any future appreciation in the house when the home is sold. This appreciate is possible given the cyclical nature of real estate. The borrower would continue living in the house and be responsible for property taxes, insurance, and maintenance.

To avoid the moral hazard of encouraging non-needy borrowers from taking this assistance, and to provide an incentive to the lender for taking an ownership stake in an asset he does not control, the lender should be permitted to add a premium to the current mortgage rate, say 75 basis. In this example, the loan modification and equity exchange results in a $200,000 7.25% fixed rate mortgage with a monthly payment of $1365, a monthly savings to the borrower of $531. The extra 75 basis points that the lender is earning on the $200,000 can offset some of the cost of capital needed to support the equity stake of $100,000. While the lender is no longer earning interest on the equity stake, the lender is in a far better than the alternative of writing off the entire $150,0000 loss if the lender forecloses.

What is the government's role in this solution. Not much other than perhaps providing favorable accounting treatment and mandating that the lenders get going.

Douglas Rossbach of NJ @ Oct 29, 2008 15:38:03 PM

Homeowner bailout would be a disgrace

There are millions of people who did not buy a house during the bubble because theese are frugal, responsible people who knew that they could not afford the vastly inflated prices. So they waited and rented. Now they are to be told that the government is going to help out the people who bought houses they couldn't afford, either by actually giving them money to stay in their home, or by working out lower interest rates, while the responsible people have to pay the higher rates when and if they buy? Talk about adding vast insult to injury!

I have no sympathy whatsoever for 95% of the people who can't pay their mortgages. A few are the victims of bad luck, but not most. Maybe some didn't understand interest rates and how they go up, but whose fault is that? Can I stop paying my credit card bills or student loans because I maybe didn't understand how much it would cost me? Can the government help me out on this? Obviously not, so why are we looking at spending hundreds of billions of dollars to help people stay in houses that they couldn't afford in the first place? Well, to prop up the bubble, to keep prices up there, in the hope that when the responsible people finally want to buy, they can be forced to pay a higher price than they should, thus bailing out the parties which hold the mortgages, and the bogus homeowners who live in the houses.

What a dreadful message to send. Make stupid loans, and the government will buy them all up and as a bonus give you a lot of cash to make your bank solvent again. Buy a big house you can't afford, and the government will help you keep it. Act responsibly, and you get no help from the banks or the government; you have to put your 20$ down, and pay every month; and the house prices are still inflated because of the help being given to the crooked and stupid. Why should anyone ever wish to act responsibly again, given the palty rewards for it?

alan richards of CA @ Oct 29, 2008 14:22:02 PM

Root cause

I agree that the author misses the point but perhaps for somewhat different reasons.

At the heart or the root cause is a mass number of individual non-performing loans - mortgage loans for example, and our focus is on those which have been bundled, "in pieces" it is said, into securities and sold on through the international economy.

Mark to market has two edges. The current housing/mortgage/borrowing market reflects the situation such distressed borrowers face. If we take the distressed loans and address them, - get to work and get ahead of the curve (surely there are records) a percentage of those borrowers (no not all) can be rescued. If banks must mark to market, failing securities then the underlying assets must be as well. Starting from zero one can establish minimum criterion for salvage and a criterion for unwinding, which will then be expunged from the system. Many, borrowers, lenders, investors will lose all. Such is risk, even if with a tripple A ribbon attached.

If indeed such loans have been packaged "in pieces" and securitized, then disassemble them in collaboration with the current suffering (snif!) holders of those securities. Disasssemble, revalue, revalidate, re-rate accordingly. There will be knock-on or a daisy chain effect in the haircut, but something is better than nothing. To say this approach would involve too much work is another way of saying the effort isn't worth it. It is!

That would require an entity which has the pockets to take them all in for treatment. The only one is the US gov or Group of 8 in collaboration.

We need to kick this dead and sstinking fish back into the river because the dock will soon be crowded with CDS and derivative positions which total 65 and 595 trillion USD respectively.

jk @ Oct 29, 2008 14:12:48 PM