To Congress: Please Read Before Bailing Out!

One of the commenters on my recent blog asked me to submit the bailout proposal I had described to "EVERY SENATOR AND CONGRESSMAN politely requesting that the showmanship, red herring concessions and false outrage end."

Morpheus008 has a fair point. Since the stress level is running high for everyone in Washington and a clear strategy has not yet been formulated, here are some talking points to consider in the bailout negotiations. My plan is presented in summary form to make it easy to use in any Congressional meeting.

Members of Congress, I respectfully request that you take a moment to read my suggestions, as an independent, non-partisan thinker, for the bailout plan.

The terms for how the bailout money should be used must be viewed as it would in a negotiation to prevent foreclosure on any property. The approach described below is being applied by pro bono foreclosure prevention projects everywhere.

First, there should be some basic terms that could be applied to the mortgages behind the pools of securities at risk:

1. Mandate the renegotiation of the terms of all non or poorly performing mortgages to a reasonable and fixed rate of interest.


2. Remove any other onerous terms.


3. Require each bank to analyze the loan portfolios they hold to determine the good, the bad, and the ugly.


4. Require the banks to present this information to the Government under oath with the threat of prosecution if the information has been falsified.


5. Allow homeowners to stay in their homes so long as they begin paying under the new terms and continue to act in good faith on their payment schedules.


6. Add any outstanding balances to the back end of the loans.


7. All of the above can be done without the Government actually purchasing the loans from the banks.

The bailout terms should be tied to the following regulatory oversight, legislation and executive compensation changes:

1. Require "earn-out" provisions of the executives of all involved financial institutions instead of limiting their compensation. These "earn-outs" would vest over a period of years, be tied to the turnaround efforts, and thus, encourage the long-term health and stability of the firms they run.


2. Require bailed out banks to make restitution to the American people to relieve us of our projected $11 trillion national deficit by paying back a percentage of profits over time.


3. Structure careful oversight of derivative products that are tied to the heart of our economy.


4. Include meaningful regulatory reform such as emergency Glass-Steagall-like measures.


5. Direct appropriate regulatory enforcement actions against corporations and individuals who intentionally committed wrongful acts.


6. Provide resources for the criminal investigation and prosecution of both corporate and mortgage fraud.


7. Ensure commitment that the safety and soundness of our banks are the overarching mission.

If these ideas can be agreed to conceptually, then perhaps a preliminary plan can be reached. If the goal is to thaw credit and restore confidence in the markets, then nothing will work better than performance of the mortgages underlying the mortgage-backed securities.

Comments

[ProgressiveVoice]

UsedToWander - I agree 100% - for any home after the primary residence. The majority of homeowners at risk for foreclosure had no reason to think the housing market would ever go down - it hasn't in our lifetime, really. Besides, don't the same investment bankers and economists always tell us land is the safest and best investment because they aren't making any more of it? With very few exceptions, most of those now facing a mortgage they cannot afford or foreclosure did NOT know what they were getting themselves into. Or if they were cautious at first, listened to bankers and RE brokers tell them over and over how home values would rise - they always do, borrow more - and refinancing was always an option. I almost bought a house two years ago when I needed to move. Thank heavens I live in California! I could qualify and afford a mortgage of about $250,000 but I would never have found a house for that little. The best I could find at the time was closer to $400,000 or more. Since I could barely have afforded the $250K, I am glad I gave up or I would have ended up getting sucked into some adjustable rate mortgage for hundreds of thousands more than I could afford to pay. I would have done it to, just to own a house. Instead, at 47, I have given up any dream of owning a home or retiring, for that matter.

[Henry]

Here is the pivotal existential question for you: Here we are suffering a massive "liquidity" crisis and we are threatened that "Main Street" could have atm's that have no cash in them! This "credit line" of liquidity, this $700 bil is there to nourish a market plagued with "toxic assets".
The conundrum, the complete surreal quality of this predicament is what ever happend to all of the "liquidity" that we were "floating" in just a couple of years ago? Lenders had more cash liquidity than they knew what to do with? Where oh where did all this "money" , this liquidity go ? (did the fed somehow "unprint" it?)
The answer to this question is the fundamantal of money.

[Henry]

There can be no terms of renegotiation to mortgages that are purchased. They should all be packaged into pools that make contracts that can be sold in the secondary market of companies to clean this mess up. These secondary companies purchase the assets at discount value and either foreclose or rewrite the loan obligations on a one by one basis until it is task completed. The only way this happens is if they buy at a discount enough to make a profit. They, however will not be ready to come in with their own risk capital until the real estate market hits bottom.
Interesting note for you, the 9/30/2008 quarterly income statements and balance sheets will be performed in two days? Wonder why the real rush?

[schatsie]

CHECK out Stiglitz on the Nations website NOW... Very interesting, we certainly do not need to be pushed over the cliff like LEMMINGS

[Morpheus008]

I already pasted an copied your proposal to my senators and representative.. I would have included a mark to market provision of the mortgages but this makes much more sense that anything our leaders have proposed so far which will not solve the supply problem in the market. More foreclosures means more supply and lower home prices for everyone. For most Americans, most of our wealth is tied up in our homes and its falling faster than the stock market. Some common sense is sorely needed and this is a good step in the right direction.

[Dynamohum]

I really would like to know just how serious the situation is, or is it mostly a big rouse? I think starting with a measured amount of funds with conditions along the way for disbursement would be prudent. I don't know anymore if we really have a huge problem, or it is Paulson and Booshies trying to get away with ?

[PT6]

DO NOT LOWER TAXES OR REMOVE ANY REGULATIONS!

"FAIR MARKETS" NOT "free markets" are WHAT MADE AMERICA GREAT!

GET BACK TO "FAIR MARKETS!"

[JBS]

I'd also require the banks to refinance the mortgages at the CURRENT MARKET VALUE for the property. If that means they have to take a write-down, that's their tough luck.

[usedtowander]

http://www.bloomberg.com/apps/news?pid=20601109&sid=aGL5l6xOPEHc&refer=home
Wall Street Executives Made $3 Billion Before Crisis

Not much reason to take advice from a Wall Street attorney who's practice is supporting the Wall Street Executives. Or, from Paulson, who is just trying to get money for his buddies.

Not one bit of credibility in the bunch.

[HockeyMom]

totally agree!!

[akindependent]

Here's one more thing that ought to be on the list. Do away with "mortgage insurance". Right now, any homeowner with less than 20% equity in his or her house is required to pay a substantial fee every month to protect the lender in the event of default. For my family, it comes to $2,400 a year, every year. It sure doesn't seem to have protected the banks, and it puts an unfair burden on the homeowner. If the banks want insurance, let them buy it if they can. And where did all of that money go, anyway?

[HockeyMom]

It's a rip off and the banks know it. It's call PMI or Principle Mortgage Insurance, and it insures the banks not you. If you could apply that to your mortgage each year you could pay off your house much quicker, but alas, the banks don't make enough money that way. So akindependent, start bending over, wall streets on it's way and it's hungry.

[usedtowander]

Unacceptable.

The individuals who made a contract to pay for their homes should be expected to perform to the contract just like the rest of us are expected to perform to our contracts. No reformation should be allowed - they knew precisely what their terms were.

Why should the rest of us pay extra taxes because these individuals took a gamble and lost?

The bankers and loan officers who made these extremely questionable loans, and the organizations they work(ed) for, should all be held financially accountable for their risky behavior.

All of these individuals knew, or should have known, that real estate prices can go down and that financial trouble can result. There isn't the slightest reason that these individuals, who engaged in risky financial behavior, should have their bets covered by the rest of us. They gambled. They lost. By what reasoning should we enable, and in the case of these companies and the executives, reward their irresponsible, possibly illegal, certainly immoral behavior?

Taking money or services from the rest of us and giving it to these individuals who engaged in this behavior is Robin Hood in reverse - robbing the poor to give to the rich.

[research]

How many pages was your loan? Mine was about a half inch thick. I read it. I have an IQ and education in the top 1% of the nation. I had to trust it did not contain hidden gotchas.

Amateur home buyers are no match for professional loan thieves.

[nezumi]

Me too and I concur. Add to that financial literacy, instinct, and some knowledge of history. No way that was foreseeable for the average home buyer. But in addition to the lack of faculty some average homebuyers were guilty of succumbing to the lure of easy money.

[Cautious]

I like this. I like it a lot. I just hope the FBI investigations of securities fraud really have some teeth.