Bernanke seems to be slowly working his way to the conclusion that the economy and the finance crisis can't be fixed without helping homeowners. As usual, he's late to the party, but I suppose better late than never. His proposals, such as they are, are vague. Let's run through how it has to be done if it's going to be done right.
1) The face amount of the mortgage needs to be reduced by the long term value of the house, as if the housing bubble hadn't occurred. This is both to reduce foreclosures and to help reset housing prices where they should be.
2) Payments need to be set at a maximum of about 30% of income. This is the decades old rule of thumb for how much a family should be paying for housing. It's also important because the more a person is spending on housing, the less they're spending on anything else, and consumer spending recovering will be important to any lasting recovery.
3) Any government mortgage needs to be senior, with no other debt able to supersede it.
4) Mortgage contracts going forward, sold by anyone, need to be defined by the government as to what the terms can be. Maximum effective interest rates, which must include any possible combination of fees, must have a maximum set by the government (ie. a federal anti-usury law), probably at prime + X, based on prime at the time the mortgage was written. This will limit balloon payments, jumpers and other such traps.
5) A floor needs to be set under housing prices. That floor should be set at either 30% what the median income in a zip code is, or at what prices were in 2002. This is the value the government will buy out a mortgage for, and it means that everyone knows what the least a mortgage (and therefore the securities based on mortgages) are worth.
6) Bernanke wants to lower interest rates, but he wants to do it indirectly, by buying Ginnie Mae securities or having Congress subsidize the loans. This is inefficient, the simplest way is to just use the banks taken over (which should include Citigroup) to make loans at whatever rate the Fed thinks is appropriate and avoid private banks refusal to lend.
7) Since a collapse in housing prices, while overall a good thing because it will increase real non-debt related consumer spending and will make Americans more competitive, will also cause deflationary pressure, some steps should be taken to increase the real economic value of houses. This means:
* Areas that will be eligible for federal aid in the form of mortgage repurchases and rewrites must change their zoning to allow home businesses;* A major broadband build-out must be done, with no usage caps, to allow folks to work from home. The current 5 gig limit that the majors seem to be moving towards is too low;
* As part of the infrastructure stimulus a massive refit of buildings for energy efficiency and generation must take place, to allow people to micro-generate power and make money that way; and,
* The power net must be reconfigured to allow micro-metering so that people can sell the energy they produce and see how much energy is costing at any given time.
All of these things will increase the real economic value of houses, and after the initial suburban shock at the idea of someone working at home, will increase the value of houses, but will do so in a way that makes economic sense. A place you can make money from, and not just live in, is worth more. A place that takes less energy to run is worth more.
This will also set a floor under a significant cause of the financial crisis, allowing firms to have a chance of actually calculating losses. The problem right now is no one knows where the bottom is, so it's impossible to know how bad a shape anyone is in. Finding that floor, or rather creating one, is essential to "restoring confidence".
Why not use some of the bank "bailout" money to reduce mortgages for those who have paid on time for 10+ years. Say..... all established mortgages reduced $50,000, allowing the remainder to be refinanced. Easier to pay, and banks would end up owning fewer houses. I just bet it would cost an average of $50,000 or more to maintain then market a vacant home. Instead of losing this amount at the end, the banks could write it off at the beginning. Perhaps a program like this could only be available to those who are unemployed or underemployed.
They already made their money especially in salary, it's not coming down the way.
A company can lose money but pay everyone ridiculous salaries.
2) Mortgage payers should be able to send in a reasonable payment, 30% like you say, and this should not be a violation or crime. The mortgage holder should suck it up and take that as the payment in lieu of their usury at 18% or whatever. They should not be able to move in and pounce on people who can still make good payments in this economy.
3) We need to educate people. They need to have a chart showing what their payments would be at every interest rate up to 30%, disclose all fees and jumps, and have people read what they sign. They should be required to plan for the worst, and past that point it is their responsibility much more so.
Maybe you should add some notes about the role of appraisers. I can see a median price for an area with pluses for quality and minuses for below-average condition. Appraisers do this -- except when are sacked for doing an honest job.
Announce it a few weeks ahead of time to give people who still have cash time to spend their savings. That will also offer an immediate stimulus to the economy by people who can afford to pay for it. Then start inflating our problems away.
If the Fed starts inflation by causing extra money to be printed, then the value of debts go down with the value of the dollar. The value of mortgages, credit card debt, and our national debt will all evaporate. Real estate will be king again.
Homeowners with variable interest mortgages will need protection. And the price of fuel will skyrocket again too. But if the government spends that new money on establishing a new energy paradigm that does not require us to import energy, then who cares about oil!
It's too bad they DON'T print paper bank notes like they did in the 1920's. Manufacturing all that paper would be a boon to the recycling industries, and to the manufacturers of wood-stoves. With special equipment to allow the paper to be burned efficiently, we would be so much better off than the Wiemar Republic... ... ... ... ...
Now, these people who never should have been able to purchase, and these banks who should never have granted loans to people with little income and marginal credit ratings, are being rescued. Those who lived within their means are having to pay for those who did not.
I'm a renter. I work in the automotive industry. The economic downturn has greatly affected me, just like it is affecting homeowners. I'm always one step away from eviction. My daughter is in the process of being evicted. Are the needs of home buyers more important than what is happening to us?
All it has to do is this: Fannie and Freddie will not purchase from the banks ANY mortgages in excess of 33% the household's annual income. This is easy to check since the government gets the 1040. If a bank wants to take a larger risk, which is legal, it should do so by finding private investors.
However, the wealthy will never allow this to happen. First, a middle class with less debt means less easy money for the rich. And second, if the rich want to see higher property values, the only way to achieve it is to increase the income for the middle class, again against everything they stand for.
Unlike the poor, the wealthy knows that wealth is relative, not absolute. If everyone in this country will get $1,000,000 tomorrow, Bill Gates will have to cut his own lawn, cook his own food and clean his own bathroom. When McCain said during the campaign that his goal is for everyone to be rich I was laughing my heart out.
FNMA did allow some divergence to these guidelines during the past few years but it was not the cause of the melt down, FNMA bad loans are only about 20% of the bad loans. They would be a lot less if the housing prices didn't fall. FNMA loans are almost by definition good loans.
Then the government can order some bailout bank to issue the new mortgage at $300,000. This would only be available for people who can afford to pay the new mortgage, yet whose income falls below some level, and for house values below some level. No more bailing out millionaires. For people who cannot afford the house at $300,000, tough luck. Go move in with a relative or rent for awhile. There's no reason to set up new loans that will likely be in default within the year.
(1) Our best interests, as a nation and as a banking-corporation, are to see to it that loans continue to be "performing." That's the only way that we can get CASH. Otherwise we're stuck with an asset that we are not n a position to sell, and if we bankrupt the debtor and declare him un-creditworthy we now have no one at all to sell to.
(2) "The market value of an asset is what a willing buyer would pay a willing seller today." If that number is vastly smaller than the value of the loan, then it is nonetheless "reality." Better something than nothing.
(3) "Usury is illegal." Unreasonable interest-rates or specious changes to rates only wipe-out the chances of collecting anything on the loan.
(4) "We are all in this together." Uncle Sam is not going to waltz into town with hundreds of billions of dollars in his pocket to pay us all off so that "we get our money no matter what happens to the poor debtor." What happens to the debtor happens to us. There is no "get out of jail free" card. There is no "golden ticket."
And how about we spend those billions of tax dollars creating JOBS through new infrastructure/industry so that people can actually afford to pay a mortgage that stays within 30% of their income. Foreclosure doesn't create homelessness and ghost towns, unemployment does.
But whichever approach we take, the housing market will collapse, and prices are going to revert to being more in line with the fundamentals. And when they do, investors and fence sitters will be flocking back into the market in droves, driving prices back up again----even if prices temporarily over correct on the way down.
You did have one idea I agree with. The gov't should temporarily be in the lending business, asssuring that necessary credit gets into the rights hands. Those of employers and job creators.
Most people in foreclosure are NOT in trouble due to a personal crisis. They're in trouble because they a) used their house as an ATM machine, assuming that values would go up forever; or b) bought more house than they could afford, believing that they'd be priced out forever, AND believed that property was going to go up forever giving them endless access to HELOCS. At worst, they felt they'd break even.
In bubblicious California, we have non-recourse loans, meaning that a primary residence (with a first mortgage) is the only collateral the bank is able to repo. Around here, we have a saying called jingle mail. The homeowner/debtor simply mails in the keys. They don't have to delcare bankruptcy, they simply walk away.
TAKE BACK CONROL OF MONEY
The American economy rests on the back of the American worker and consumer. Taxpayers own the government and currency is only a tool enabling commerce.
Take charge of it. Get it working for you, not against you.
http://pacificgatepost.blogspot.com/2008/12/revising-government-relationship-to.html
Once this is done, the other problems will resolve naturally, including home owners making their payments.
In other words, you don't really have a solution, do you?
1. Caps on interest rates, cannot be more than 2.5% above the Federal Reserve rate for the next 6 months... The government bailout is assuming the risk, so that banks should no longer be charging risk premiums for the loans..
2. 50% of foreclosures are due to Medical Expenses.. Allow drug importation from Canada.
Then consider having the mortagees with overwhelming medical bills take them to Medicare for reimbursement review and hopefully reduction. and cap the interest rates that the hospitals can charge for the bills...
How's about some of this bailout loot get put back into the hands of the taxpayers- it's our money- so that we can pay down our debts and actually stimulate the economy.
I know, I know, stupid me.