The Simplest Plan For Helping Homeowners
Some banks gave mortgage loans to people who cannot keep a house under any conditions. These so-called toxic assets paralyzed the banking system, as now no one knows how much the banks are worth. With banks being essential for the economy to function, the government is allocating a lot of money to protect them from collapse. The same, the recession caused by - let call it as it is - a pyramid scheme lending spree, is affecting everybody. In particular, unemployment increased and many people that are still employed do not earn as much as before. As a result, many of them fall behind in paying their mortgages, deepening the crisis.
We know that as it has happened many times before, eventually the economy will bounce back. The objective is to find a solution that would allow avoiding foreclosures for those homeowners that, under less stressful circumstances, would be able to pay their mortgage on time. Unfortunately, no one can help in those instances where a mortgage was issued on fraudulent documents to a person that has no means to make the payments.
Pumping money into a black hole on Wall Street will not do it. Only a handful can see and understand how this money would be used. Furthermore, it means giving money to people who got us into this mess at the first place. It is not right; it is not wise either. Banks evolved into gigantic financial dinosaurs and some of them need to die as the dinosaurs did. Quite simply, we should not have banks so big that a failure of a few of them could kick the nation's economy out of balance. However, given the current distress, it is not the right time to reform banks.
The most that the government can do to help homeowners is to buy them some time so banks can figure out among themselves how much they are worth. The simplest way of buying time is by issuing ad-hoc emergency loans to individuals who cannot afford to pay their mortgage. By issuing these loans, the government would guarantee that not one house would be foreclosed upon within the next six months, but the next six months only. Within this time, banks would figure out the real value of their assets. Some banks would go down, some would split, and some would find ways of handling their toxic assets.
By paying all defunct mortgages for six months, the government would extend the solvency of the current banking system. However, banks would administer the government's emergency loans. By doing so, they too would have an additional six months: but to review case by case all their troubled mortgages. On some, they would give up and write them off. On others, they may be able to refinance the loan on better terms. By the end of the six-month period, banks will know the value of their assets much better.
For individuals who would be able to pay their mortgage after receiving the six-month government loan, banks would repay the government within a short term, and would incorporate this debt into their clients mortgage or equity line.
If an individual receiving an emergency loan to cover mortgage payments were to fail to pay his or her mortgage after the six-month period, his or her bank would repay the government first before getting any money from the foreclosure. This would be beneficial to banks as well. Today, with so many foreclosures and the recession, housing prices are falling off a cliff. A house priced $300,000 two years ago could be worth as little as $150,000 today. Six months of mortgage payments on the $300,000 loan is anywhere between $10,000 and $15,000, depending on the interest rate. We should expect that with the stimulus package and with the government plan assisting homeowners, the economy will bounce back within the next few months. Housing prices would follow suit. Instead of a fire sale for $150,000, a bank might be able to sell the same house six months later for $180,000 or more. Even after paying back the government emergency loan, it would lose less than by selling this house today for $150,000.
Assuming that the government would need to assist 9 million failing mortgages and assuming $1,500 as an average monthly payment, the government would need to assign $81 billion to this project. In his plan, President Obama assigned $75 billion for assisting homeowners. However, for his plan to function, additional $400 billion need to be pumped into Fannie Mae and Freddie Mac. It is - again - saving dinosaurs, giving money to the financial institutions that brought this crisis upon us at the first place.
Comparing with the plan proposed by President Obama, with the implementation of this concept, the government does not need to get involved into the nitty-gritty of the banking business. It will just open a credit line for banks to draw against defunct mortgages. The burden of repaying these loans will be on banks, not on the homeowners. The government does not need to create any bureaucracy to assist homeowners in distress. The government would put banks in the position such that speedy finding a mortgage option that the house owner can afford is in the best financial interest of the lending bank. With this mechanism, one may expect that banks will draw much less than $75 billions. Furthermore, all these funds will be clean shot short-term loans; not giveaways like Wall Street got.
Additionally, with this solution, we do not need new - raising controversies - laws giving judges powers to rewrite mortgages.
By offering short-term loans, the government would be using taxpayer money wisely to stimulate banks to reform their lending practices, and would help those citizens that fall into trouble not due to their mistakes.
The beauty of this concept is in its simplicity; everybody can see how the money would be spent. Lastly, it is so simple that no one can screw it up in implementation.
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How do you feel about the "give the money to the taxpayers exclusively to pay of debt" idea, assuming there was a workable way to dole out the money?
The theory being that the loans are paid, the banks get their money back (sans interest but maybe with early payoff penalty?) and it's like starting over...
An economic system can only function at all, if -- in the long run -- prudent people are being awarded. We should not try to save those who behaved recklessly. However, those who acted carelessly created such havoc that on its way down can swirl down everybody. It looks like that we all will pay for sins of the few. The objective is in creating a mechanism that those who were prudent would suffer the least. My proposal meets this criteria.
I think that's exactly the right way to do any banking assistance, or aid to any other corporation. Given what H.A.K. said about rewarding the prudent, ANY money that we the people give to corporate entities should be funneled through their individual, citizen debtors, in payment of their/our debts, because corporations have not been endowed by any Creator with unalienable rights. They have such privileges as the people choose to grant them; we humans are top priority.
Repeat this as many times as you can, in as many places as possible.
What happens when everything is worse six months from now?
Great question. No one can guarantee the future.
However, coming from the logical analysis of what we know, today we can take actions that most likely will lead to the better future.
The difference between my proposal and many other proposed here is that many alternative voices repeat a mantra “free market did not work, let try nationalization”. It is emotional bouncing from one extreme to another, without attempts of understanding what is going on.
I try to go to the core of the problem and then arrive with a solution. Is my solution the best? I do not know, please show me a better one for consideration. However, please do not link me to panicked voices telling “the market fundamentalism is dead” and asking for jumping blindfolded into socialism. I had been there.
I am just a simple guy who owns a carwash, but it seemsto me that we have an investment problem. Awhile back we decided that we were going to allow the american workforce to compete with business and nations that paid their workforce barely anything. Like China. So good jobs and whole industries in this country disappeared. Afterwards we decided that housing was now the engine of the economy. All the money went into the creation of new housing. Banks only wanted to lend money to people buying houses. I could get a loan for 5hundred k to buy some crappy mini mansion, but there was no money for me or other people borrow for business. I wanted to start an enviromentally friendly heating and cooling business. Whereisthe capital for that. Instead banks only would give money to anyone with a pulse for a house. Why do you think we have over supply of homes, and an under supply of new cutting edge industries in this country.
I simply do not understand why the government didn't declare a rolling bank holiday to determine whic banks were solvent months ago. The pain we are experiencing is long, protracted anxiety. A lot of pain upfront would have allowed us to move forward in a rational, logical manner armed with the facts. Is it too late for the cold hard truth?
Here is another thought about Obama’s mortgage bailout plan. It is so small, and helps so few people, it isn’t really a bail out at all. It doesn’t help those with mortgages over $625,000, a second home, investment properties, and those who have no mortgages (20% of the US total). Those who do qualify will have to run a gauntlet of qualifications and paperwork. No wonder the market for mortgage backed securities completely shut down! The plan does enable Obama to satisfy the left wing of the Democratic Party crying out for some government relief of their constituents, like Nancy Pelosi. It also makes a nice headline.
Good idear we have allready given too much $ to the banks
This will never happen because the bankers lay down the law to congres
If you really are convinced that this is a good idea, instead of complaining that nothing can be done, sent letters to your congressional representative as well as your senators and request that they support this concept.
I grew up in Poland, then under Soviet domination. If I - and millions of other Poles - had the same attitude as you do, the Soviet Union still would be around. In this comparison, leveraging undue influence of banks on the U.S. government seems as an easy task.
Oh, and all mortgages everywhere are capped at 5.4% forever, and for all time.
It looks like you are really the LeftistGuerrilla. Sorry, Cuba looks like a better place for your proposal.
ya...people who cant afford to put 20% downpayment on their home, its a good idea to cap home loan rates at 5% for that.
that would cover the risk huh !!
get out of your parents basement and join the real world
My plan is simple. First, ARMs are retroactively banned. 120 day moratorium on foreclosures and mortgage payments for EVERYONE (not only those that fit some unfair formula). Get current or arrange a short sale. Oh, and unless you are disabled, elderly, or with children, you go to the back of the line.
I like no mortgage payments for 2 months thing (since I wrote it first below). People who actually can still afford their mortgages would spend this money giving the economy a crazy boost.
Doesn't that make sense? When I contacted my lender last summer they offered to do this for me and the missed payments would be tacked on to the end of the loan. I think there was a fee. For those behind, they could catch up. and those current would have extra money to spend.
Why not merely forego foreclosures and mortgage payments for 6 monthhs? Heck even 2 months would boost the economy enormously.
In the early 1980s there was a recession in America that hit agriculture particularly hard. Reagan let 20% of American farms be "culled" sinking agriculture (as a segment) into depression. This got rid of excess capacity and shrank prices, farms as well as commodities. Reagan could have reached out to farmers but, being a practitioner of the free market, the "culling" was necessary. (the Market is their God and they are disciples of the marketplace).
Barack will do the same thing for American housing. We are watching a "culling" in the marketplace that will reduce prices, crush unions, and flatten excess in America vis-a-vis the world market. These boys are all world class free traders. What you are watching is the force of factor price equilibrium. It is ugly. The cosmetic effort to assist a certain stripe of troubled borrowers is a confidence pitch to allay outrage at what will be permitted to take place. They are looking for a market bottom. They'll not get this by efforts that prevent it.
Here is another thought about Obama’s mortgage bailout plan. It is so small, and helps so few people, it isn’t really a bail out at all. It doesn’t help those with mortgages over $625,000, a second home, investment properties, and those who have no mortgages (20% of the US total). Those who do qualify will have to run a gauntlet of qualifications and paperwork. No wonder the market for mortgage backed securities completely shut down! The plan does enable Obama to satisfy the left wing of the Democratic Party crying out for some government relief of their constituents, like Nancy Pelosi. It also makes a nice headline.
Exactly, Obama’s plan reflects the eagerness of bureaucrats to mangle with the banks.
The essence of my proposal is that banks stay being banks, the government stays being the government. As banks got us into this mess, in my approach, the government - by giving ad-hoc loans - uses its power to force banks to resolve their problems among themselves.
Yes, good plan I think. Only thing I'd change is the term -- 9 million mortgages properly addressed in 6 months? Ain't going to happen. Make it a year, please. (The other beauty of your idea is that it prevents turning neighbors against each other as the Obama plan, as we have already see, surely does.)
Home prices are too high. Let them fall to a point where people can buy a home without being forced to sign a predatory loan.
The government needs to stop giving greedy banks money. You can't fix loan problems by giving out more loans. Let the prices fall - it's as simple as that.
I agree. Home prices are still far above those when the big upswing started. So these are still inflated prices, adjusted to reality, especially since we face more downturn in the economy.
At some point I think we have to just call a halt to the ARMs, and press the reset button on everyone. Trying to piece this together in such a market is madness.
I too have thought about the efficiencies of direct lending to the consumer, rather than giving trillions of dollars to investors, banks and homeowners. There would be some chance of recovering the taxpayer money, and not overly rewarding the irresponsible behavior of the greedy speculators.
This could possibly even be jiggered in a way that those who cannot qualify for refinancing to find short term capabilities, say up to 24 months, through low interest short term loans to be used solely for mortgage payments. This would buy time for the banks and regulators to value, restructure or dispose of mortgages, buy time for the consumer to rectify their finances or declare banckruptcy, and buy time for the housing market and economy to strengthen. And, maybe give politicians time to better understand where to go from here (not that many politicians are really up to that task!). For many people I know, just anecdotal evidence, this lifeline might be enough to save their homes and prevent bankruptcy.
There are bound to be unintended consequences, primarily delaying the inevitable for many and the cost of lost loans. But the rush to remedies that we have seen in the past four months are breathtaking in their potential unintended consequences, and the stated costs are staggering.
Sometimes simple is the most eloquent and best solution to a problem.
This plan is merely a different way of transferring money from the government to the banks. It also rests on the flawed assumption that it makes economic sense for someone to continue making payments on a $250,000 mortgage for a house "priced $300,000 two years ago" that is "worth as little as $150,000 today." Sure, it puts off foreclosure for six months while the government provides the money used to make the mortgage payments. But, at the end of that six-month period, if the house still is worth "only" $150,000 (which still is probably more than what it was worth five or eight years ago), what incentive does the debtor have to continue making payments on the $250,000 mortgage? Also, what impact is this going to have on the neighbor of the person who gets the government loan but who still is able to make his/her mortgage payments? The inequity would be too blatant for this to be acceptable.
There is a reason why nobody in Congress or the financial sector has proposed a "simple" solution to the mortgage problem, such as the one proposed by the author of this article. To put it simply, there is no "simple" solution to such a complex political and economic problem.
I agree with most of your comments, except you and the author's example of a home that lost so much value is not the situation I think this would fit. This solution would work for people who are employed and can pay on a mortgage and whose home has not lost all of it's equity or are at least in the ballpark of value/mortgage equillibrium.
I have a brother in this situation but he was stupid enough to finance with a pay-option ARM (against my advice) that has just reset at a high rate. His logic, and that of the broker he used is that he could sell or refinance three years down the road and not be forced to pay the high rate. There are millions of people who thought the same thing, not knowing that selling and refinancing would become near impossible three years later. I still think he was stupid (given the uncertainty of the future-- he planned to sell and is a remodeling contractor who has seen his income take a big hit in the past six months) and the Countrywide broker was predatory because he could have gotten a different loan product but this was most profitable to the broker.
But now these millions of homeowners are defaulting because they cannot refinance and it is killing the housing market. And contributing to the economic contraction. As you said, it is a complex situation, but some elements of it may have simple solutions.
In some extreme cases, we can easily see that the house price was grossly inflated. It would be a big loss if foreclosed today. It might be not much better six months later.
However, in general, house prices follow the market. They were artificially high a few years ago; they are artificially low today.
In the Obama’s plan, it would be up to bureaucrats to determine which mortgage is worth saving, which is not. In my approach, by making payments even for obviously faulty mortgages we leave it to the bank to decide if it would be better foreclosing now when the prices are very low, or six month later when the prices may rebound. Regardless if bank will accept only one or six monthly payments from the government, it will need to repay it anyway. Each bank may have a different policy, as conditions differ in various communities.
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