The above is important context for this post. No matter what the final combo of acronymed facilities, stimulus programs and the like it will not be fair to everyone.
First, a slightly more serious point. There has been chatter about refinancing mortgages to 4.5% but then the chatter moved to talk of 3%. This would create a lot of problems, well maybe not the borrower. Lending a bunch of money for 30 years at 3% exposes lenders to interest rate risk. What happens when rates go back to normal? Any bank loaded down with a bunch of 3% debt that is unlikely to refinance away will face a whole new set of writedowns when rates go back to 6 or 7%--or higher. It would seem to me there would be all sorts of problems for banks and other lenders putting out that much money at 3%.
I don't know if securitization is now supposed to now be dead but assuming not how eager are you to collect 3% for ten years, oh wait no I mean 30 years? 3% would seem to be a problem at many stops along the food chain and so I doubt it will happen.
Now for my not so serious idea, scrap all of the acronyms and stimulus plans now in motion or on the drawing board. According to this there are 44 million mortgages out there. Why not structure a program that earmarks every mortgage be reduced by $100,000 and then refinance every mortgage based on the new principal amount at the same interest rate already in place for the specific mortgage?
If you have a $400,000 balance at 7% after implementation of this plan you would have a $300,000 balance at 7%. The borrower would have a payment that was smaller by $665, the bank would have another $100k to strengthen its capital ratios and a loan with an interest rate that is still marketable.
You might be wondering why not give everyone the same percentage of their mortgage, like 20%. You certainly could but that would be as unfair.
The only, ahem, problem is that the cost is off by one decimal place. If I counted zeros correctly, the cost would be $44 trillion. If it worked out to $4.4 trillion it would be in the ball park of what will be spent. Oh well back to the drawing board.
30 comments:
I'm not sure you counted the zeros correctly. I think it is $4tr. Also, "wiki" says the whole us residential mortgage market is $10.6 trillion. "Only" 10% of those mortgages are in trouble. Hence for $1 trillion it seems to me all bad mortgage problems could totally " go away". As you say ...that would be totally unfair, but it would make the problem go away.
Instead the government is spending several trillion in bailouts, stimulus, loans, etc. and spreading fear and panic.
I have come to believe the $1tr in bad residential mortgage loans being the cause of the problem is way overstated. It is simple to understand and people can relate to it, so the pols and press push it. However, the bad mortgage problem could be solved for a lot less money than the govt. is spending. I think the real problem the government is trying to make go away is $55tr in unsecured credit default swaps. Trying to explain that to that market to the public is nearly impossible so it is not talked about. However, I don't things will return to "normal" until the cds situation gets under control/unwound.
Question: what is the "term" of a credit default swap? Does it last for 1-3 years? OR does it last for the life of the underlying security which is likely longer term?
A way to make it less fair would be to limit it just to California, Arizona, Nevada and Florida and give them each $200,000 not just $100,000.
While bad residential mortgage loans may be important or even the crux of the economy's larger problems, bailing out homeowners would leave a bad taste in my mouth. I've owned six homes, never had a morgage below 8%, and am now mortgage-free. Current mortgage rates make me salivate, and then to hear talk of bailouts at 3.5% seems, well, unfair.
That must be how non-automakers feel these days, too.
I like Dr. Hussman's idea of, yes, allowing a reduction of principal but then having that reduced amount as a claim against futures sales proceeds either during lifetime or in an estate. YOU CAN'T GIVE THESE PEOPLE SOMETHING FOR NOTHING!! Some skin needs to be in the game for all involved or it won't work.
http://www.hussmanfunds.com/wmc/wmc080922.htm
DE
You are talking about giving $100k to people who intentionally lied on their mortgage application.
These people should be in jail not rewarded.
actually it is a tongue in cheek suggestion that would give the $100k to the bank and reduce the loan balance for the borrower, note the emphasis on tongue in cheek and the label of humor attempt.
Trouble is: you call it humor, the government calls it policy. Heh.
I don't like that type of idea, but I haven't put concrete thought into what should be done. At least partially because I'm annoyed that, in the end, these people will get rewarded and I won't. heh.
Let's stay with the $100,000 for each mortgagee that originally put 20% down (doesn't matter if they have an equity loan) and is in the 28% tax bracket or lower. It could also be extended to those who put at least 10% down and have no additional home equity loan. Now that has to significantly reduce the 44MM mortgages and help the people who didn't lie.
Oh, and if you are in the higher brackets and think this is unfair, your greed is showing!
Not all of the people with mortgages in excess of the FMV were liars. Basically, anyone who bought a home in the last 3 years paid too much. If this were your first home, you really got screwed, because you did not have an overpriced home to sell.
The lenders may as well create a long term reserve for excess loan value--it is likely to be LESS than non performing loans that will result from failing to modify the loan terms. Perhaps the FED comes in to shore up the "reserve" and then the banks amortize (reduce) the reserve against the loan payments. Rather than recognizing a monstrous expense, they do so over the life of the loan.
To the extent that home prices recover over the life of the loan, then the reserve could be reversed.
What's wrong with just enforcing contracts. This country was built on the rule of law and fair play. If crimes were committed, then appropriate action should be taken. If investors were greedy, then a humbling lesson of risk vs reward will be taught. If people bought more house than they could afford, then next time (if there is one) they will pay more attention and ask questions. I seriously doubt we'll see people thrown out of their houses living in cardboard boxes.
I don't know who will be harmed, but those of us who played by the rules and pay our taxes should not have to shoulder the burden. I worked hard to pay for my house and never asked anyone for assistance. We have lived below our means and showed restraint while others were spending like there was no tomorrow. Well, tomorrow is here.
If the feds have to get involved, they should just correct the supply and demand problem with bulldozers.
rule of law and fair play? that ship has sailed. Homey don't play that. That dawg don't hunt.
Anyone who is an observer of Chicago-style politics knows that the maxim for any political act is, "Where's mine?"
There are a lot of votes to be bought with the currency of "mine", usually unwarranted and unjustified. The orgy of socialist envy has only just begun.
T
T
I'm 45 and I guess it just shows how out of touch I am Roger, I have no clue what your 1:28 post means. Care to translate into English?
Anon 1:22
just a joke; rule of law and fairplay seem to have taken a backseat.
Let's see, hmm. This is for anon 1:22, the homey.
There's an older homeless woman in out little town. She is out all day on the square and then goes to a shelter (PADS) at night. We don't know why she is homeless. Could be unfortunate circumstances or it could be by choice? We don't care. We see her every week or so and we give her some money. She's not begging or looking for a handout. She just wanders around the square or sits on a bench. Everyday. It's been brutally cold here and we would feel badly if we didn't help. There are many like her.
But if I listen to anon 1:22, then to heck with her. Hey, don't give her anything because it's probably her own fault! Why should you give away your hard earned money?
Because it's the human thing to do and people need help with their mortgage. Any plan we follow will find money going to someone who doesn't deserve it. So what? We will be helping people.
Anyone who disagrees should give pause. Especially at this time of year.
We don't need no stinkin scrooges!
Sorry to use your blog site as a forum for my soap box dissertation. I couldn't help myself.
Knock $100,000 off of the mortgages but make them take in a homeless person and support them. Give the banks a cds for $100,000 and tell them they can call it capital. It will be a Merry Christmas to all.
Whoa 3:12,
You have the wrong guy. I'm no scrooge. I said I doubt we would see people living in cardboard boxes mainly because I believe people for the most part will step in and help those in true need. For the average joe that bought too much house, he'll find a way to survive. Friends, family, whatever.
You can blame do-gooders who believe institutions for mentally ill people are inhumane for flooding the streets with the homeless. I have seen in my community where government run institutions for the indigent/mentally ill are closed and the residents have no where to turn but the streets. I'm sure you have heard this before.
FWIW, I have contributed generously to the Salvation Army, the Wounded Warrior Project,and the Smile Train. I also have not laid off any employees in this downturn and have actually paid them for not doing any work. They all appreciate it too. They also appreciate their $2500 Christmas bonus. Furthermore, I provide a man free housing and utilities and ask nothing in return except to have a living being at night near my machinery yard to keep the thieves away. I don't want a pat on the back or recognition, I'm just asserting that I am not scrooge-like.
I know there are uncaring people out there, but I am not one of them. But I believe the best way for people to get out of their problems is for them to help themselves.
If you're so compassionate, why don't you take the homeless woman in yourself? Why don't you provide her a place to live? Why don't you give her a job so that she can help herself?
The answer is, each of us can't help everybody. We do what we can. But we don't have to let dishonest and greedy people walk away from their bad deeds.
Anon 1:22
To James E.
Charity begins at home. If she is wandering about, the lady is either mentally unstable or does not have the right government case worker granting our tax dollars on some totally free home/utility/counseling/job training(sic)/free food and transportation program. Or both.
Living in an urban area, her situation as you describe sounds very fishy to me. Very fishy, indeed.
To anon 1:22
Good for you. Your first comment inferred a different person.
To anon 3:38
We've lived in this small town for 18 years and we know who most of the homeless are. My wife has volunteered for PADS, Meals on Wheels and was president of our Food Pantry. They don't beg, ask for a handout and as far as we know, they don't commit crimes. The only fish here are in the markets.
T makes a very important point. The social consequences of this crisis could be the deathknell of this country. There are millions of us who've played by the rules, lived within our means, and don't go see government as our nanny.
Thats said, if the government continues to down the path of bailouts, handouts, and subsidies for those who've made bad decisions, those who've lived beyond their means, those who rolled the dice without care - your going to see an uprising.
I'm not talking about a guns-in-thestreet revolution, but a quiet "FU everybody, I'm getting mine too" free for all.
Matthew Lesko books will be flying off the shelf and those who previously could care less about what Uncle Sam was peddling will be knocking at the door.
How many times did Pavlov ring the bell before he got the response he was looking for? Our government may have rung their Pavlovian it-doesn't-pay-to-be-responsible bell for the last time.
I appologize for poor grammar, punctuation, etc.
Lesko! lol
Right on Tom K! Front page yesterday's WSJ, "Developers Ask U.S. For Bailout As Massive Debt Looms". These are the guys who started this big mess.
The headline should read, "Developers ask U.S. For KY Jelley As Stiff Prison Sentences Loom."
Sorry if I have offended anyboday.
Anon 1:22
Ditto on poor spelling etc.
Anon 1:22
"stiff prison sentences"
Real stiff. We can only hope.
Here is why bailing out homeowners won't work:
1. Folks who were able to refinance out of the teaser rate mortgages are already defaulting on the new mortgages. About 38% are 60 days or more behind after refinancing. Bottom line: these homes are way too expensive for these folks...period.
2. If you follow the Hussman plan, people will still walk away. Why would they pay on the mortgage for 30years and not get the appreciation. We are programmed that homes are a wealth builder. Sure, you may get most of your principal back, but a good percentage, if not all of the appreciation would be gone. Most folks would just walk and start over.
3. Every mortgage holder would look for a way to get in on this. And, they should. If others who lied on their mortgage app get a bailout, then every American should.
4. Roger is right. What bank in their right mind would loan for 30 years at 3%. The monies they received from the TARP are being paid back at 5%. That is a 2% loss if I am doing the math right. Even at 4.5% that is still a 0.5% loss.
Let the market correct. Sure, some folks will lose their home, but they are the ones who should feel the pain, not the responsible taxpayer.
The government is going to give these people a handout = we can't stop it = we all know it's true.
Again,, I will resort to my Dr. Hussman argument and if we drop the principal by $50,000, we give the bank a chit for the same against those people that stays with them for their lifetime (unless, of course, paid off before death) with some sort of small interest accrual to the bank and it goes as a priority claim in their estate (BEFORE the greedy kids = as an estate planning attorney, I can tell you with few exceptions, the kids are the ones driving mom and dad into the office to find out how to impoverish the folks to ensure that the kids get an inheritance while the taxpayer foots the medicaid bill = GRRRRR, don't get me started!!!)
DE
Here is a crazy idea:
Let lenders go bankrupt.
Let home price drop to the proper market level.
Create home purchase programs for "bankrupt" people so they can re-purchase a home for 80% off and become homeowners vs. life long debtors.
This downturn has to be the most publisized, advertised and scrutinized in history. The big falls in all equities have been due to selling, because of the leverage needed to fund expansion in the emerging markets reversing, causing margin calls and massive speculation.
Everything is now oversold and will continue to be so through most or all 2009.
Kirk Kinder
just so you can think about the situation correctly, your math is flawed for a bank - banks employ leverage, say 10X, therefore with a cost of funds of 5%, they would certainly not lose loaning at 3% - the cost of their money is effectively only .5%, so they would have a positive spread.
the issue is as stated, who would want to own the resulting 3% paper for 30 years.
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