Fixing Housing & Finance: 30/20/10 Proposal
A Modest Proposal: The housing crisis worsened over the summer of 2008, prompting Congress to debate various bailout proposals. But the housing market worsened, raising the default rate on mortgages. The entire inverted pyramid of derivatives built on top of the mortgage market further worsened, adding yet more pressure to the credit crisis. The bankruptcy of Lehman Brothers and the nationalization of AIG were the results.
The response to this financial crisis from the Treasury Secretary Hank Paulson borders on Insanity: An outrageous trillion dollar plus bailout, with the potential for unlimited expenditures at the behest of the Treasury Secretary. It is a terribly expensive plan, one that prevents judicial or administrative or budgetary review. It is fraught with moral hazard, rewarding bad judgment and excessive risk taking. It punishes the prudent and rewards the profligate.It focuses on all the wrong issues.
Worst of all, it is unlikely to work.
Most of the current solutions under discussion amount to throwing obscene amounts of money at the problem, rather than recognizing what the key issues are.
These approaches have several fundamental problems. The goals are less than desirable: 1) they attempt to keep people in homes they cannot afford; 2) The Paulson plan takes bad loans off of the books of poor lenders, and dumps them onto taxpayers; 3) They maintain price supports for homes that remain significantly over-priced.
At the heart of the $700 billion dollar unlimited finance Paulson bailout is the desire to move weak performing or poorly made loans off of the books of the lenders who made them and onto the taxpayers back (likely via the FHA). To understand the folly of the this housing bailout, one must grasp the magnitude of the prior housing boom, as well as the historical norms that exists in the American housing market.
The current proposal moves bad mortgages from the irresponsible lenders to the innocent. It punishes every taxpayer who was prudent, and every homeowner that behaved in a responsible manner. It eliminates the sanctity of contracts, and allows judges to “cram down” mortgages.
These may be desperate times, but they do not call for ill thought out, desperate measures. Rather than merely criticize the $700 billion dollar unlimited finance Paulson plan, I would instead like to propose an alternative approach, one that costs much, much less, and is more likely to be effective: The 30/20/10 Proposal.
A MODEST PROPOSAL: A MORE REASONABLE WORKOUT FOR LENDERS AND BORROWERS THAN THE TAXPAYER FUNDED BAILOUT . . .
>
To understand pricing of homes prices in a historical context, we need to consider several different metrics. Economists traditionally employ a variety of ratios to compare where housing prices are relative to traditional pricing and affordability measures. The most reliable of these look at the ability of a purchaser to service a mortgage via salary, forming a ratio of annual median income to median home prices. This can be analyzed nationally, or on a region by region basis.
Yet another methodology compares the cost of purchasing a house versus the cost of renting a similar house. Numerous other measures involve factors such as mortgage rates, inflation, housing supply, new home construction, etc. For our purposes, we will use the two metrics above, as they provide the greatest insight into price and value.
A simple comparison of the median US income versus the median home price nationally is quite insightful. As we have shown previously, as home prices rose in response to ultra-low rates, the median US income failed to keep up. As prices began to slide downwards – they are off 16% from the 2006 peak as of September 2008 – they still remain significantly higher than had been historically relative to income.
Houses may be cheaper than they were two years ago, but they are by no means “cheap” on a historical basis.Indeed, prices remain quite elevated, which is one of the reasons sales are off 30-40% from the 2005-06 peak.
The current bailout proposal would have the FHA refinance mortgages at 85% of their present value, or would simply have Uncle Sam overpay for them, taking them off of the books of the lenders or speculators who currently own them. This effectively rewards lenders who made irresponsible loans, as well as rewarding the buyers of homes who could not afford them. It effectively punishes every taxpayer who was prudent, every American who tried to live within their means, and any homeowner who behaved in a fiscally responsible manner. It is the very definition of mortal hazard, and is very likely to have negative consequences for decades to come.
One of the problem that taxpayer-funded bailouts create is that it eliminates any incentive for industry to fashion solutions on their own. Far too many banks, brokers, insurers, and investment pools believe it is easier and cheaper to lobby Congress than suffer the consequences of their own poor decision-making.
Despite the lack of self-reliance on the part of the banking industry, it's really not that complicated to develop potential solutions to the ongoing crisis. With a little creativity, we can craft an alternative solution. In doing so, let's recognize several truths regarding the current housing situation:
• Home prices remain elevated;
• Artificially propping up home prices is counter-productive;
• Home owers (No equity, 100%+ debt) who are in houses they cannot now, and never could afford, are going to have to move to homes or apartments they can afford;
• The banks that made these bad loans to unqualified borrowers should suffer writedowns;
• Taxpayers should not have to bailout borrowers who are in over their heads, or lenders that made these bad loans.
If we use these as our preliminary facts and assumptions, we can craft a response that is rational, effective, efficient and requires very little taxpayer money. This means, however, that there are still several million people that are in the process of moving from living in a mortgaged home to moving to a rental property or a purchased property they cannot afford.
This is what is required to help normalize prices and supply.
Instead of the massive Paulson bailout plan, let's consider a different type of solution, one that can be effectuated by a combination of policies and actions via Congress, banks, and private equity, with the loan servicing industry participating.
I call it the "30/20/10" solution to the credit crisis:
30: Takes up to 30% of any current delinquent mortgage and separates it from the “main” mortgage; it goes into a 2nd, interest free-balloon mortgage, and stays on the books of the present mortgage holder;
20: The plan’s goal should be saving at least 20% or so of the current delinquent and potential foreclosure properties; Of the 5 million homes that may be late in making payments, (the first step along the road to delinquency, default and foreclosure) the process should make 20%, or 1 million homes eligible;
10: The Balloon payment comes due in 10 years, and will be treated as a 2nd mortgage, with interest charges only accruing as of October 1, 2018; it can be refinanced or paid off in full.
The 30/20/10 option allows the lending entity (or its equivalent) to pull aside up to 30% of the mortgage as a separate interest-free balloon payment. The remaining mortgage is refinanced at a fixed rate for 30 years. The balloon payment will "restart" fresh in 10 years. Between now and then, there will be no interest costs or penalties for this separate loan.
Consider the advantages of this plan: It would prevent a significant number of foreclosures from further roiling the markets; it takes bad loans and avoids the write down so long as thy are performing; and it allows many people to stay in homes they can afford. Moral Hazard poses no problem in this plan.
Here are additional specifics: At least 70% of the existing mortgage becomes a new, refinanced, fixed rate, 30 year traditional mortgage. And, a loan payment for up to 30% of the original mortgage, not accruing interest, with repayment of principal and interest due beginning 10 years hence, makes the present house affordable. In other words, this would look like an ordinary mortgage plus a balloon payment, one that would not begin accruing interest until year 10.
Congressional action is required to exempt the balloon payment from causing a tax issue, as this is essentially an interest free loan might be a taxable event.
The securitization of mortgages creates its own additional difficulties in attempting to resolve defaults and delinquencies. Residential mortgages get bundled into RMBS, which were then sold and resold to various Wall Street purchasers. One of the current problems in resolving the situation is identifying who is the actual owner of the mortgage in question. This can be resolved with a clever little act changing notification provisions, requiring further Congressional approval.
Any entity that identifies a potentially problematic mortgage, i.e., delinquent and in risk of default, can start the process by evaluating the property value and the borrower's ability to repay the loan. If they believe a mortgage would be suitable for a 30/20/10 workout, they would then send notice to the current recipients of the mortgages interest and principal payment. This entity would have 30 days to reject the workout, and failing to do so in that time Is deemed to be an approval.
In our solution, it is the financing party – a private equity firm, a real estate fund, or even a US capital pool created for this purpose – that can make this request for a 30/20/10 solution. Notice is sent by to the current loan servicer, i.e., the firm processing the mortgage payments, and forwarding them to the mortgage owner. The servicer is in the best situation to send the 30 day notice, and if no written objection is received, from the whoever currently owns the mortgage – be it bank, mortgage pool, or other securitized owner – the refinancing process begins.
Instead of a foreclosed property, the former mortgage holder is left with an interest free, 10 year balloon on up to 30% of the mortgage. They also have a lien on the property, and no writedown on the delinquent mortgage for at least 10 years.
There are other details that need to be worked out -- the priority in case of sales, what happens if there is an eventual default, how to avoid fraud, etc.
The end result of the 30/20/10 workout would be the following: Homeowners who can afford to make payments on the refinance home get to continue living in them. Neighborhoods are spared the negative impacts that Foreclosure has on property values and the blight of abandoned houses. Lenders get to avoid writing down up to 30% of suitable but problematic mortgages. The balloon payment stays on the books as a liability, but it is not written down until, if and when it defaults 10 years later.
The upside of this proposal is that it serves a variety of interests with a minimum of congressional market interference. Those homeowners that can afford to stay in their house with a little bit of help avoid foreclosure. Banks and mortgage holders get to avoid writing down delinquencies that could be avoided. Neighborhoods are spared the negative impacts that Foreclosure is known to have. Loan servicers can expand their business to process saying the 30/20/10 workout papers. I would expect a variety of private equity funds will leap into the void and begin looking for mortgages to rewrite as 30/20/10s.
Congressional action required would be to 1) Eliminate the tax issue for the interest-free portion of these loan; 2) Create a Legal standing and guidelines for this notification and waiver policy. The goal here is to insure that the complexities of determining who actually owns a a mortgage dozen not interfere in its work out; 3) Create any required exemption for banks and lending entities to avoid taking a write-down during the period of the 10 year in balloon forbearance.
Weaknesses and criticism: I would expect several objections to be raised to this proposal. From those representing homeowners who face potential foreclosure, the complaint will be that this plan fails to save more than 20-30% of those who might lose their homes. For the various funds and investors that own the underlying mortgages, there will be a complaint that notification provisions are insufficient. Lastly, given the enormous size of the Federal free lunch proferred by the Treasury Secretary, the banking industry will be reluctant to embrace any such workout that might be perceived as interfering with their ability to feast at the public trough to the tune of a trillion dollars.
~~~
No matter – this is a much more workable plan than the Trillion dollar Paulson giveaway. And, it restore responsibility and consequences to both lenders and borrowers who engaged in reckless behavior. We should consider a private sector solution to the currently mess we find ourselves in.
>
Previous:
NAR Housing Affordability Index is Worthless
http://bigpicture.typepad.com/comments/2008/08/nar-housing-aff.html
Monday, September 22, 2008 | 07:30 AM | Permalink
| Comments (81)
| TrackBack (0)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef010534bb09bb970b
Listed below are links to weblogs that reference Fixing Housing & Finance: 30/20/10 Proposal:
Comments
"Worst of all, it is not likely to work". That is far from the worst. This is the greatest attempted power grab in history.
Talk about turkeys voting for Christmas. If the Congress votes for this naked transfer of power then they fully deserve all that will come about. We might as well have horses in the Senate, as has been done once before.
To yield almost infinite financial power to an unelected official, without any oversight or future review, is completely crazy and without precedent. What happens when this period of foreseen and avoidable emergency is over ? Will the appointed all-powerful tzar - the most powerful economic dictator in the history of the world - simply , quietly and passively, retire and let this power abate? Has such a thing ever happened before in the history of the world?
Of course not. Another, entirely synthetic, emergency will be manufactured and passively promulgated by the docile compliant press as an event that really, really needs strong forceful action. But this time the position of financial czar will also have political power. The man that first grabs this power is dictator for life, and no doubt also for the lives of his children and grandchildren until the money is totally gone.
This is much worse than the powers stealthily acquired by Hitler in the 1930s. At least he had a degree of popular support, and did stand in elections. More analogous is the power achieved by Stalin in the USSR, or , more so, the Democratic People's Republic of Korea under Kim IL-sung. This is nothing less than asset stripping and a grab for power by the financial elite. God bless America.
Posted by: gordon | Sep 22, 2008 7:38:31 AM
This would be equivalent, no, worse than bailing out the Internet bubble equity and bondholders.
It was a bubble, asset prices need to come down. Good companies (yahoo, amazon) will remain in business, bad ones will go under forever.
Write it off, close it down, sell it to the highest bidder, the faster the better.
Japan also tried the "hide the toxic salami" game and they're still in the crap hole after more than 20 years. The US economy isn't as dependent on a bunch of finaglers like Japan's "economic groups" were. The US has a chance to play it different and get out of it ahead like in past crisis.
This money is badly needed to STIMULATE THE REAL ECONOMY, NOT to to bail out some rich folk and finaglers like Hank and friends. If this goes through money will be much more expensive and it will be harder to stimulate the economy, build infrastructure, support the needy (remember GD's soup lines?), spend on the economy to revert the vicious cycle create by the deflationary pressure from the debt collapse.
Posted by: Jetlag | Sep 22, 2008 7:54:57 AM
The critic is well-founded. Besides the bailout does not help much to the necessary consolidation of the financial sector.
It seems to me, that Mr. Paulson is again one step behind. He cannot keep all the financial companies alive in the end. With the bailout the financial sector is encouraged to continue in the old way without restructuring. This will just prolong the misery, but will not eventually save the sector.
Posted by: Our man in Helsinki | Sep 22, 2008 8:01:36 AM
Just let me have the houses for 20 cents on the dollar and I'll turn around and sell them for a nice profit and reinvest that profit back into the system creating more business, jobs, and income. Hey, we prudent ones need to be rewarded! Why doesn't congress find out through the tax rolls ect., who has been prudent and reward them with a chance to pick up these properties on the cheap? Now that would be much more than fair. That would be poetic justice.
Posted by: JustinTheSkeptic | Sep 22, 2008 8:04:39 AM
Gordon:
Unfortunately, that's how power has always been taken: bit by bit, right under everyone's eyes!
(1938) Chamberlain appeasing the Brits with Hitler promising peace:
http://www.youtube.com/watch?v=nZHpprf6HSM&feature=related
Posted by: D. | Sep 22, 2008 8:06:34 AM
This plan also encourages homeowners to go into default. Homeowner moral hazard.
~~~
BR: These are mortgages that are about to go into default anyway -- AND, we can add some terms that make it undesirable for other, non defaulting homeowners.
For example, it prevents future HELOCs and further refinancing w/o the permission of the lender. That's a serious give up.
And, in the event of any sale of the home, the balloon payment, plus all interest, is immediately due.
There are other penalties that could be added.
Posted by: Me | Sep 22, 2008 8:10:49 AM
Not a bad proposal, but have you tested it against any real pool of distressed homeowners. When I look at the local pool of properties here in the OC through realtytrac, I just don't see that the homes that are in foreclosure or preforeclosure would qualify for this 30/20/10 program. The amount owed as compared to the current market value of the homes is just too high.
There are investment pools willing to step in and buy foreclosed homes in bulk from lenders, investors, and local government agencies ready to buy and renovate these properties.
Making a pool of money available for silent second mortgages could move a lot of moderate income homebuyers into these homes.
It's just not the same people who are in them now, whose total loans are too damn much above the current value of the property, and that value still makes this housing unaffordable.
There's a major revaluation of housing prices that needs to finish, and we need to provide liquidity to the financial system in a way that doesn't attempt to prop up the ridiculous prices in many markets with more government money.
Posted by: Spud | Sep 22, 2008 8:17:14 AM
Here's a solution, do nothing. Everyone talks "free market" and loves its attributes but no one wants to let it work when they don't like the preconceived outcome they think it might produce.
Here's the latest hobgoblin trotted out before the cameras last week by Paulson and Bernanke:
“If we don’t do this, we risk an uncertain fate,” Mr. Bernanke added. He said that if the problem wasn’t corrected, the U.S. economy could enter a deep, multi-year recession akin to Japan’s lost decade of the 1990s, or what Sweden endured in the early 1990s when a surge in bad loans plagued the economy and sent unemployment to 12%."
Yeah. So what.
I’m not trying to be cavalier about a major recession or a lost decade but that in fact may be what we need after 30 years of continuing intervention by the government in preventing the free market from cleansing itself after extended periods of excess. Each intervention in turn leads and encourages further excess. Much has already been written of the infamous “Greenspan put”. You can google it for more detail.
http://en.wikipedia.org/wiki/Greenspan_put
If you want, we all pretend to, the benefits of capitalism you have to accept the creative destruction that comes with it. The markets were crashing because the previously cheered on housing bubble had burst. Banks, brokerage firms, Fannie and Freddie, AIG et al were disappearing because they were meant to. Morgan Stanley and Goldman should have been next. They had all readily participated in the false economics of the bubble. Who forgets the 100’s of tech companies that disappeared when that bubble burst bringing down the NASDAQ 85%. No one intervened for them and rightfully so. Trillions were lost in shareholder equity. We survived and Tech is healthier for it. Now IPO's have to come to the market bearing profits not promises.
Yes people were/are losing their homes and rightly so in most cases. They were not qualified to own them in the first place and they knew it. This whole madness was an attempt to take home ownership from the then 65% to the current 69% starting during Clinton’s first year in office. Hello to Fannie Mae's new mandate--hit the ask on everything. Now once again the government has stepped into the breach to prevent the market from straightening out the mess.
I find it interesting that the man waving the wand just happened to be the ex-CEO of a major instigator in this whole mess–Goldman Sachs. A firm I might add he only left in 2006 to become Treasury secretary. Of course he knows about the problem, he personally made 100’s of millions in salary and bonuses in benefiting/causing it in the first place.
As we stand by and witness/cheer–talk about Stockholm syndrome–we also take as gospel Paulson/Bernanke and others description about what the outcome of "no action" would be, as the quote I used to start this comment indicates. How do they know that? If they could not foresee the problem how do they know where the market solution was leading? They didn't and they don’t. All they are certain is they did not want a free market solution. By controlling the solution at potentially trillions of dollars in cost they get to design the future. I’d gladly settle for a market solution. Perhaps a miracle will take place in DC and this package will go no where.
I trust the “secret hand”. With a little luck this market will rally and then roll over to new lows washing out all the firms and practices that caused all these problems to begin with. Otherwise welcome to the next, ever bigger, bubble. These new trillions are going somewhere barring the aforementioned miracle!
Posted by: patrick k. neid | Sep 22, 2008 8:19:55 AM
As for solutions, here's my idea:
Instead of bailing out Wall Street---which won't do anything to help taxpayers---why not extend the $700 billion credit line directly to individual homeowner-taxpayers who are in trouble.
Here's how it would work.
Troubled taxpayer (T) applies to Federal government through his/her local IRS office for a pin number that is tied to his Social Security number.
T uses pin number to apply for a loan directly from the government to pay off his mortgage. The government reviews his tax returns (they already have them) to see if his income is sufficient to qualify, using a 4x ratio, i.e. loan can be no more than 4 times income.
Government transmits monies to bank, paying off troubled mortgage and the principal plus 2% interest (could be anything minimal) is added to taxpayer's T's tax balance and is be paid off through increased withholdings. IRS now owns mortgage on property and can enforce liens, etc. The bank is now out of the picture
This is just the general outline, but why wouldn’t it work?
Posted by: craig in georgia | Sep 22, 2008 8:25:04 AM
Barry, Thanks for posting an alternative plan. Many of the blogs I visit just rail against the bailout without offering something else. With absolute knowledge that some kind of bailout is going to happen, their best shot is to say 'it shouldn't happen".
Our best alternative thinkers need to suggest plans, just as you have. Thank you.
Posted by: uncool | Sep 22, 2008 8:34:00 AM
Is it just me or does this plan sound a whole lot like the Super SIV from 2007 ?
Posted by: Michael Donnelly | Sep 22, 2008 8:36:24 AM
another take
http://corner.nationalreview.com/post/?q=ZGE5MmE0YmRiODA3YTRiNzFlN2FmNDU5N2I0ZDc3YTE=
Posted by: txchick57 | Sep 22, 2008 8:43:16 AM
"Another, entirely synthetic, emergency will be manufactured and passively promulgated by the docile compliant press as an event that really, really needs strong forceful action."
Docile and compliant press;man! that is a very generous description. Try completely clueless and uninformative.
Case in point: I've spent several hours during the weekend reading relevant blogs and foreign publications, archives of newspapers etc.
The most important proviso of this bailout is the unlimited power it would grant to the Treasury. Power that would be outside the purview of the Courts AND Congressional oversight...the famous "trust us" so typical of the Bush Administration in times of crises, perceived or real.
Well! Wouldn't you know it, I grabed my Philadelphia Inquirer early this morning, and read exactly what I expected: NOT A FREAKING WORD on this proviso, nor any relevant detail about the limit of money to be spent. And, OR COURSE, nary a mention of the hundreds of millions of dollars in fees for outsourced services going to assets management specialists that would "help" (as in "Help themselves") the Treasury assess the bad debt. Reading the Inquirer's account of the Paulson plan, you would never ever know it is bad to the core.
Long story short, the extraordinary incompetence of the US press, so in evidence since 9/11, is one big reason we are in this pickle. So is the fact that regardless of what this deleterious Administration has done in the last 8 years, there are STILL around 30% of the voters who consider Bush has done a good job. When 1/3 of the adult population refuses to think, to observe and to assess what's really going on, the country has a significant problem to deal with: the rise of the ditto-monkeys.
As for Barry's proposal, it has one fundamental merit: it address the very source of the problem, housing prices and all its intertwined problems.
The biggest fault is that the solutions proposed are not sexy, do not make for attention-grabbing headlines, and forces some people to think and work extra for their money. In other words, it tries to go against 2 very entrenched syndromes in America: the "American Idol" syndrome and the Pigs at the Trough" syndrome.
I estimate the probabilities of this proposal ever being read in Congress to 1,000,000 to 1. It is too down to earth and sensible for serious consideration.
Posted by: Francois | Sep 22, 2008 8:44:38 AM
This isn't a bailout, its the perfection of the long con.
The majority of that money will walk out the back door in the form of overvalued assets or loans to banks that should and will go bankrupt.
Welcome to the Great Treasury Robbery of 2008!
http://i37.tinypic.com/2evarex.jpg
Posted by: Actual Money | Sep 22, 2008 8:51:27 AM
"Is it just me or does this plan sound a whole lot like the Super SIV from 2007 ?"
We'd be so lucky!
What this proposal amounts to is a carte blanche worth 700B (Not as a limit mind you, just the max amount at any time during 2 years) to one unelected official who couldn't be prosecuted for any action taken with this money. We are supposed to give him absolute discretion and power to distribute this cashola as he see fit.
Paulson: "Hmm! I see here that you contributed 10% of your pre tax profits to the Republican Party. Very thoughtful of you Sires!"
Posted by: Francois | Sep 22, 2008 8:51:48 AM
Plain and simple: an administration that requests a $700 billion 'fix' brings its resignations in the same package. Any banks that get toxic crap taken off their hands become government property and exec salaries get reset to government employee levels. Any past bonuses paid by these companies to those people get deducted from current pay.
Posted by: wally | Sep 22, 2008 9:01:14 AM
All those smart people with huge incomes in congress and the senate are protecting their own assets. The foxes are guarding the hen house... The only reason Paulson stepped in was that a lot of rich people in the United States were about to be hit with some financial tsunami that would have completely changed the nature of the world. Those of us poor middle class educated folks have the skills to survive. The rich folk wouldn't be able to survive a minute in the real world without all their paper money.
Posted by: Mattie | Sep 22, 2008 9:06:39 AM
This exchange from this morning’s NY Times just about says it all. It gives a sense of just how devoid of reason, how internally contradictory the administration’s argument in favor of the $700 billion bailout is:
Representative Barney Frank, the chairman of the House Financial Services Committee, put forward the Democrats’ proposed changes to the administration’s plan. They would give the Treasury secretary the authority to set “appropriate standards” for compensation of senior executives whose companies sell troubled assets to the government.
Under a so-called claw-back provision, the secretary would have the power to force companies to recoup previous payments to executives of companies involved in the program. And Mr. Frank’s plan would give broad authority for the Government Accountability Office, an investigative arm of Congress, to audit and oversee the program.
But Mr. Paulson said that he was concerned that imposing limits on the compensation of executives could discourage companies from participating in the program.
“If we design it so it’s punitive and so institutions aren’t going to participate, this won’t work the way we need it to work,” Mr. Paulson said on “Fox News Sunday.” “Let’s talk about executive salaries. There have been excesses there. I agree with the American people. Pay should be for performance, not for failure.”
But he quickly added: “But we need this system to work, and so we — the reforms need to come afterwards.”
http://www.nytimes.com/2008/09/22/business/22paulson.html?pagewanted=2&_r=1&hp&adxnnl=1&adxnnlx=1222084842-P1mQZfRnxsgvwULjD5OCIg
So let me get this straight. The only way the bankers will participate is if the US taxpayers give them a blank check with absolutely no strings attached. Otherwise, as Paulson says, they “aren’t going to participate.”
But, almost in the same breath, if the taxpayers don’t give the bankers everything they want, exactly on their terms, then there will be "economic calamity," "meltdown," and "cataclysm".
Actually, this type of “reasoning” has a name. It’s called “Divine Right:”
Divine sanction thus made the monarch right in reason, and not merely by might, his power was in every way legitimate.
At the same time, the theory imposed terms: the king must feel the deepest awe in the face of his responsibilities. If he governs badly, he will suffer. On the other hand, if he does govern badly, and the people suffer, it is because they have sinned and are being punished.
Jacques Barzun, From Dawn to Decadence
It was with good reason that FDR dubbed the nation’s economic elite “royalists.”
Posted by: DownSouth | Sep 22, 2008 9:09:33 AM
There is a reverse auction mechanism here. A market is being created for these illiquid assets. The mark to market reforms have helped to extend this turmoil since ther are no liquid markets available for price discovery. The vast majority of these laons are generating cash flow. No one is getting away with anything. All this plan does is speed up the process of discovering what value still exists. Over time and if properly managed, some of these assets may turn out to be profitable to the ultimate holders. If the markets are facing a snowballing liquidity crisis, there is no better solution. The one question still to be addressed without trying to make political hay is 'How did we get here?'
Posted by: Tom C | Sep 22, 2008 9:10:51 AM
STOP MAKING SENSE!
I have been thinking about this by making changes in the bankruptcy laws and writing down the value of the mortgages to reflect current pricing so both sides take the hit and reissuing a new 30 yr mortgage.. How would you work changes in the bankruptcy laws? Two, in your proposal would you keep the no recourse to courts portion? This is the most aggregious part ot me and made worse by the fact the current plan wouldn't work
Posted by: Robert M | Sep 22, 2008 9:11:08 AM
Barry,
If the industry lobbyists agree with you then you have a winner. Any chance?
Posted by: Carmen | Sep 22, 2008 9:13:44 AM
http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130/
Does this new proposed legislation repudiate the SEC asset leverage exemption made in 2004 for the 5 major IB's? Or more to the point, will Merrill, GS, and MS still be able to keep themselves leveraged over a 12-1 ratio while still selling bad debt to you and me as the primary assumer of their debt risk?
If the answer is yes, then molotov cocktails lobbed through the foyer glass at all their local offices is the only right and proper response to this 'legislation'.
Posted by: Mark W | Sep 22, 2008 9:19:37 AM
I think you may have an issue taking the 30% portion of your plan and placing it in second position, seeing as many of the homes already have second liens.
Furthermore, I'm not sure 30% and 0% interest is enough given this environment.
Lastly, why not add to the plan a penalty to the defaulted homeowner. i.e. If and when the homeowner sells, for the 'honor' of being bailed out, you will forgo capital gains exemption on the sale of this property (no ands ifs or buts)with no expiration of this clause.
Posted by: Portland Refugee | Sep 22, 2008 9:19:38 AM
I definitely agree that instead of the government buying the "bad credit" and postponing the problem (plus taking risks of further costs for the U.S. than the initial 700 billion at stake), the problem that initiated the credit crisis has to be addressed:
inflated mortgages that the home owners can't pay back and the inevitable, long correction of the housing bubble
Now, I'm not sure if I quite understand this 30-20-10 plan ...
But isn't one of the problems, that in several states of the U.S. homeowners are protected, so that they needn't pay back the mortgage but are eligible only for the house, so that foreclosure is actually attractive for many families?
At least I heard that on a german/french documentary about the deficit spending of Americans and the housing bubble.
In the same documentay, they also showed, that the average uninhabited house in the U.S. quickly becomes uninhabitABLE, because it is raided, damaged, etc.
So in addition to the correction of market prices, there is a real depletion of value.
How can one address this?
Shouldn't the financial institutions and especially Fannie Mae and Freddie Mac avoid foreclosures by suspending mortgages for a while and renting the houses back to the owners?
The plan of restructuring mortgages that you present here goes in the right direction, but if the information from that documentary I saw is accurate, it would be hard especially for Freddie and Fanny to get people stay in a house they can't afford for 10 more years and eventually pay back what they owe, when the homeowners can choose foreclosure and restart somewhrere else with one of the now "cheap" houses.
It would be great to find out, whether the U.S. legislation really protects homebuyers that way. If yes, I don't see any way out of a meltdown of the U.S. economy.
Posted by: Beret (from Germany) | Sep 22, 2008 9:20:23 AM
Leave the market alone is the only solution. No plan of any kind is the only solution that is guaranteed to work. All this other is wasted ink.
Most of the folks that trade the markets, talk the markets etc are clueless. They are afraid of it, have no clue how it works and they definitely don't want to find out.
Lets get down to the nub. Tell me something all you great seers, were you going to cut me check from your house profits when you sold it? I didn't think so. But boy do you cry like stuck pigs looking for a handout, suggesting solutions, blaming this party or that. The housing bubble was just that a BUBBLE. Get over it.
Your cheap dreams of being millionaires without doing anything for it are gone.
Man up and let the market wipe the slate clean. Learn your lessons the way the "Techies" did in 2000. If we lose a decade so be it. I'd rather that than lose generations as we slip lockstep into some green curtain demigod pulling strings to supposedly massage our way into the future.
Posted by: patrick k. neid | Sep 22, 2008 9:24:04 AM
