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Another proposed solution to the mortgage crisis
Old 03-09-2008, 05:23 PM   #1
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Another proposed solution to the mortgage crisis

Martin Feldstein penned an opinion article in the Friday, 7 March Wall Street Journal proposing another solution to help with the mortgage crisis. As we've discussed in other threads, there are a couple of factors contributing to the present "crisis."
- Most of the high-risk mortgages have been securitized, so there's no longer a bank involved which cna negotiate with the borrower (to extend the terms of the loan, lower the payments, even forgive debt, etc) in order to keep the home"owner" in the house.

- Because of the high loan-to-vale ratio of the original mortgages and the present slide in the value of many of these homes, the homeowners will soon have negative equity. Thus,no reason to stay in the house (except the considerable ding on their credit).

Feldstein proposes a new government loan program. The govt would sell bonds, and use the money to fund 15 yr loans worth 20% of the mortgage value. The homeowners would take out the loans (at very favorable rates, only slightly higher than the bonds issued to fund them) and the funds would go to the mortgage holder to pay down the mortgages a lot and reducing their principal and interest payments by 20%. The homeowner's monthly payments stay about the same, but the amount of interest they would pay would be cut appreciably. Unlike a conventional mortgage, these would be "recourse" loans, and the person taking the loan out would be subject to having other assets/pay seized in order to make the payments. There would be no new govt bureaucracy--the present mortgage servicing agency would also collect the payments for the new loans

Result: Homeowner now has equity in the home, is less likely to abandon it. This will help avoid an erosion in property values in nearby homes, and the value of the mortgage backed securities would go up considerably.

As much as I dislike the idea of more govt involvement in the present situation, this has the virtue of at least avoiding a direct bailout. I also wonder if there might not be a mechanism for Uncle Sam to recover part of the admin costs through a fee to holders of the underlying mortgage-backed securities (since they will directly benefit as their relatively risky bonds increase in quality). Finally, I wonder if many homeowners would take this deal. Sure, they'll save on interest, but they'll give up the "right" to walk away from their homes loss-free if it reaches a negative equity situation. As Feldstein points out, this loan would not be attractive to those who are already in a negative equity situation, but the vast majority of homeowners aren't there--yet.
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Old 03-09-2008, 08:29 PM   #2
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I saw this and couldn't figure out what it accomplishes.

If I have no intention of defaulting, I take the gov't 20% and lower my rate a little. The gov't has to go into the bond market and sell some more bonds, marginally increasing the rate it pays on all new or rollover borrowing. The current mortgage holder loses 20% of a good loan. So it saves me some money, costs the gov't money, but how does this help the "crisis"?

If I'm thinking I may want to take the walk-away option, I stay away from the gov't program. That doesn't change anything.

Maybe there is someone in the middle. The family that expects to pay off the loan, takes the gov't program, and later gets into trouble. In that case, the big bad gov't has to go after them, maybe harder than a normal lender, in order to enforce its "recourse" clause. I have trouble seeing how that would be politically possible. We simply shift the default costs from the current, foolish lenders to the gov't.

Am I missing something?
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Old 03-10-2008, 11:10 AM   #3
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Quote:
Originally Posted by Independent View Post
The current mortgage holder loses 20% of a good loan. So it saves me some money, costs the gov't money, but how does this help the "crisis"?
Just an observation, and a clarification. The gov't does NOT have any money of it's own. The only money that the gov't has is the money that it collects from all of us in our taxes. Therefore whenever it is proposed that the "gov't" pay for something, it really means one of two things. Either a program already existing will be cut, or taxes will have to be raised to cover the new expenditure. So one way or the other the gov't does not really pay for anything..... we do... The reality is that the only people in the US that can really say the "gov't's" money are those 40% who do not earn enough, so that they pay no taxes at all.
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Old 03-10-2008, 11:19 AM   #4
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Seems like too little, too late. I don't see the delta between the program rate and the mortgage rate being large enough to save anyone (especially if it only applies to 20% of the loan).

I do see people jumping into these and screwing the government out of the payments. Now it truely IS a bailout. Especially since the gov is in a second or third or fourth ... position.
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Old 03-10-2008, 01:36 PM   #5
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Originally Posted by armor99 View Post
Just an observation, and a clarification. The gov't does NOT have any money of it's own. The only money that the gov't has is the money that it collects from all of us in our taxes. Therefore whenever it is proposed that the "gov't" pay for something, it really means one of two things. Either a program already existing will be cut, or taxes will have to be raised to cover the new expenditure. So one way or the other the gov't does not really pay for anything..... we do... The reality is that the only people in the US that can really say the "gov't's" money are those 40% who do not earn enough, so that they pay no taxes at all.
You are, of course, right. I figured I didn't need to spell it out.

How about this wording?

Quote:
So it saves the borrower some money, costs the taxpayers money, but how does this help the "crisis"?
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Old 03-10-2008, 04:11 PM   #6
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Forgive me if that came across poorly.... been having a really bad day. But I heard of a survey that was conducted a while back where something like 50% of americans really did believe that the govt has their "own" money. And they did not understand the whole concept of the govt's money is really "your" money.
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