Here's a Mortgage Bailout that works

JakeWilliams · Post by **JakeWilliams** » Sat Mar 07, 2009 1:28 am

Sorry for the topic, but I really want to get some feedback on this... And I know one thing for sure - if there's a problem in my plan, someone here will tell me how stupid this idea is...

I am in support of helping the troubled borrowers who are in over their heads and in danger of losing their homes. Everyone knows foreclosures drop the values of responsible borrowers homes' as well, so it has to be stopped.

But I feel the biggest reason that the market is reacting poorly to all of the bailouts is that there isn't enough being done to make sure the people at fault are held accountable and to make sure they don't profit from bailouts. People consider every dollar thrown at the problem lost, and are thus afraid to invest.

One thing the government can do that would make responsible homebuyers like me happier with the "mortgage and irresponsible borrower bailout" is to stop rewarding bad borrowers and lenders, yet still give them a way to avoid foreclosure:

1. Allow any homeowner (or just troubled mortgages) to apply for a government paid "balance reduction" of up to 20-35% of their home value (or more, whatever it takes).
2. Use the 75 Billion set aside for mortgage bailout to pay the money directly to the banks who hold the "troubled loans", reducing the amount owed on the property to (likely) well below "market value".
3. Allow the homeowners to refinance their mortgages at market rates (now that their principal has been reduced, the market can accommodate them as a normal customer).
4. MOST IMPORTANTLY - The government should put a LIEN on the property for the amount paid that will be reimbursed when the home is sold to recoup the money from the borrower who used this bailout.
5. Participation would even be 100% optional. If the homeowner doesn't need the bailout to stay afloat, they won't take it.

This will have the following effects:
* It will help stop foreclosures on troubled mortgages
* It will provide more money to banks who hold troubled assets, which will help free up credit
* While it may still reward people who over borrowed, they will not profit because the bailout money is essentially just a zero interest loan that isn't paid back until the house is sold..
* It will not reward banks who over lended
* With the foreclosures slowed and credit freed up, the current supply of houses on the market will drop, increasing demand and value for all, including responsible homeowners.

Banned · Post by **Banned** » Sat Mar 07, 2009 1:45 am

Hmm, mark this one on the calender. I agree with you 100% Jake. I'm with you on making those responsible. What about the people who it's to late for. It is really a sad situation.

tonefight · Post by **tonefight** » Sat Mar 07, 2009 1:49 am

It sounds good.

Now what are ya gonna do with the stock market ?

lonewolf · Post by **lonewolf** » Sat Mar 07, 2009 2:29 am

All that does is reward bad behavior and fiscal irresponsibiity. So what if the property value dropped? The point is, they can't afford the mortgage payment they signed up for, so why should they get a standard of living that they didn't earn? This is the kind of policy that got us here in the first place.

I don't want to see one penny of borrowed taxpayer money go to pad the value of these $500,000+ properties that have significantly dropped in price.

What you are suggesting is an interest-free, open-ended loan.

If they can stand the test of a re-finance at a significantly reduced interest rate, that's would be a little more palatable, but aside from that...tuff titty...let the people who bought $2 million dollar properties over their head settle for $1 million dollar properties and the ones who lose the $1 million dollar properties settle for the $500,000 ones, and on down the line. There is plenty of reduced real estate to go around, so let the banks eat the bad loans they made. Don't adjust the house to the borrower...adjust the borrower to something they can afford.

That's how things get weeded out in a capitalist democratic-republic.

lonewolf · Post by **lonewolf** » Sat Mar 07, 2009 2:31 am

tonefight wrote:It sounds good.

Now what are ya gonna do with the stock market ?

I'm going to ignore it and buy bonds that are paying double digit dividends.

JakeWilliams · Post by **JakeWilliams** » Sat Mar 07, 2009 2:31 am

tonefight wrote:It sounds good.

Now what are ya gonna do with the stock market ?

Fix one problem at a time...

But, if you think about it... The housing bubble popping is what caused this whole nightmare. The stock market crashing is very much a result of the the massive amount of equity lost in these "troubled" mortgages because the normal American is scared, ie, consumer confidence is down.

So, my idea is to fix the problem where it started and just hope and pray it has the same ripple effect that caused the problem in reverse, adding equity and confidence to americans that in turn cause them to buy and invest in the markets...

It ain't a perfect plan, but at least we WILL get this money back eventually...

tonefight · Post by **tonefight** » Sat Mar 07, 2009 2:34 am

lonewolf wrote:All that does is reward bad behavior and fiscal irresponsibiity. So what if the property value dropped? The point is, they can't afford the mortgage payment they signed up for, so why should they get a standard of living that they didn't earn? This is the kind of policy that got us here in the first place.

I don't want to see one penny of borrowed taxpayer money go to pad the value of these $500,000+ properties that have significantly dropped in price.

What you are suggesting is an interest-free, open-ended loan.

If they can stand the test of a re-finance at a significantly reduced interest rate, that's would be a little more palatable, but aside from that...tuff titty...let the people who bought $2 million dollar properties over their head settle for $1 million dollar properties and the ones who lose the $1 million dollar properties can settle for the $500,000 ones, and on down the line. There is plenty of reduced real estate to go around, so let the banks eat the bad loans they made. Don't adjust the house to the borrower...adjust the borrower to something they can afford.

That's how things get weeded out in a capitalist democratic-republic.

Good points, I was thinking more along the lines of the middle class with the $100K-$150K properties. When you put it in terms of million dollar homes ,I agree let them lower their lifestyle.

JakeWilliams · Post by **JakeWilliams** » Sat Mar 07, 2009 2:35 am

lonewolf wrote:All that does is reward bad behavior and fiscal irresponsibiity. So what if the property value dropped? The point is, they can't afford the mortgage payment they signed up for, so why should they get a standard of living that they didn't earn? This is the kind of policy that got us here in the first place.

I don't want to see one penny of borrowed taxpayer money go to pad the value of these $500,000+ properties that have significantly dropped in price.

What you are suggesting is an interest-free, open-ended loan.

If they can stand the test of a re-finance at a significantly reduced interest rate, that's would be a little more palatable, but aside from that...tuff titty...let the people who bought $2 million dollar properties over their head settle for $1 million dollar properties and the ones who lose the $1 million dollar properties settle for the $500,000 ones, and on down the line. There is plenty of reduced real estate to go around, so let the banks eat the bad loans they made. Don't adjust the house to the borrower...adjust the borrower to something they can afford.

That's how things get weeded out in a capitalist democratic-republic.

While in principal I totally agree with you and do not want to see these stupid borrowers bailed out at all with any money, especially taxpayer (my) money...

My home has been appraised recently for a home equity loan and it came in at 30% less than what it appraised at 2 years ago.

Responsible borrowers are suffering with them and it's only going to get worse if we don't stop forclosures...

And we're not giving them anything that hurts us in the long run... They have to pay that money back when they sell the house.

So, really, responsible borrowers are not losing anything, but will eventually gain back the equity in our homes.

And PS. A lot of these troubled mortgages in the $500K range are by people who were duped by unscrupulous real estate agents and mortgages lenders who convinced them that it was an investment that couldn't fail because prices were going up year after year... They're not all just THAT bad at math...

lonewolf · Post by **lonewolf** » Sat Mar 07, 2009 2:43 am

tonefight wrote:
lonewolf wrote:All that does is reward bad behavior and fiscal irresponsibiity. So what if the property value dropped? The point is, they can't afford the mortgage payment they signed up for, so why should they get a standard of living that they didn't earn? This is the kind of policy that got us here in the first place.

I don't want to see one penny of borrowed taxpayer money go to pad the value of these $500,000+ properties that have significantly dropped in price.

What you are suggesting is an interest-free, open-ended loan.

If they can stand the test of a re-finance at a significantly reduced interest rate, that's would be a little more palatable, but aside from that...tuff titty...let the people who bought $2 million dollar properties over their head settle for $1 million dollar properties and the ones who lose the $1 million dollar properties can settle for the $500,000 ones, and on down the line. There is plenty of reduced real estate to go around, so let the banks eat the bad loans they made. Don't adjust the house to the borrower...adjust the borrower to something they can afford.

That's how things get weeded out in a capitalist democratic-republic.
Good points, I was thinking more along the lines of the middle class with the $100K-$150K properties. When you put it in terms of million dollar homes ,I agree let them lower their lifestyle.

You can't even buy a decent house for under $250K in most of the affected places like Florida and California. Most of the affected properties are much higher, even after the deflation. Aside from that, if a person can't afford a $150,000 mortgage at a low rate...say 4%...they probably shouldn't own a home.

lonewolf · Post by **lonewolf** » Sat Mar 07, 2009 2:48 am

JakeWilliams wrote:And PS. A lot of these troubled mortgages in the $500K range are by people who were duped by unscrupulous real estate agents and mortgages lenders who convinced them that it was an investment that couldn't fail because prices were going up year after year... They're not all just THAT bad at math...

It doesn't matter...they obvoiusly couldn't afford the house payment they signed up for. Let them try to re-fi and if they don't qualify, et the bank eat it and sell it for what they can get out of it. Let the buyer move down a few notches to a price they can afford.

JakeWilliams · Post by **JakeWilliams** » Sat Mar 07, 2009 2:59 am

lonewolf wrote:...

I wish there were some way to do just that...and not effect my house value...But there isn't.

The thing is, I totally agree with you - and I wouldn't give a damn about the value of my home today - except I'd "prefer" to sell my house right now because it's too big for just one person...

But I can't sell it, because it's magically lost 30% of it's value for NO reason other than the market's flooded with foreclosures.

The insurance company estimated rebuilding my house would cost $170K.
It appraised 2 years ago at "between 155K and 160K".
It appraised in November of '08 for $122K.

Am I gonna sell? Hell no. I have to wait until the market recovers and it's value is at least reasonable before I even think about it.

But, if you personally *want* to (and can) stay in your home for the next 5 years - which is probably how long the market will take to recover - then I can totally understand your opinion and agree with you on the principles...

For someone like me, I'm kinda hoping for a quicker fix.

lonewolf · Post by **lonewolf** » Sat Mar 07, 2009 3:13 am

Most people mistakenly believe that this whole mess is because of the popping of the real estate bubble. The increase in mortgage foreclosures only revealed the real problem: poorly designed mortgage-backed securities that are impossible to place a value on.

Even if many of the at-risk mortgages are fixed, the problem still lies with the valuation of the mortgage backed securities. The only way to fix the problem is to either shed some light on the make up of these securities, or buy them all up and "unpack" them. This is something that the SEC needs to take care of.

The mortgage situation should be left to the free market.

JakeWilliams · Post by **JakeWilliams** » Sat Mar 07, 2009 3:25 am

lonewolf wrote:...

I'd say you're both right and wrong about this.

The housing bubble popping - which caused many people to lose massive amounts of equity in their home (and thus halted their ability to buy more stuff) - is directly what caused the problem. It did not "shed light" on anything.

The main problem was that when the bubble burst - people couldn't refinance their homes anymore - and their only option was foreclosure - which made mortgage backed securities "toxic" because you can't accurately predict their value...

And the reason people can't put a value on the mortgage backed securities is because nobody knows when the recession will end, and the longer it goes - the more people will lose their jobs, the more people will foreclose and the more flooded the market will get and the lower our house prices will go - causing us to buy less shit - and thus fueling the recession.

The value in a mortgage backed security is calculated from the money coming in from borrowers of the mortgages contained. You can't put a value on them until you stop the foreclosures - because it changes as less people pay their mortgage.

But, as soon as you stop (or slow) the foreclosures - the securities can be "valued" properly and sold again - and credit will start to flow as these securities change hands.

Edit: The reason banks won't sell the mortgage backed securities right now is because they would have to sell them at such a loss it would be stupid to get rid of them - because they most likely will make more money by keeping them.

lonewolf · Post by **lonewolf** » Sat Mar 07, 2009 4:17 am

JakeWilliams wrote:The value in a mortgage backed security is calculated from the money coming in from borrowers of the mortgages contained. You can't put a value on them until you stop the foreclosures - because it changes as less people pay their mortgage.

That is incorrect. The value of a mortgage backed security is the value of the active mortgages (which is indicated by your explanation) PLUS the value of the inactive and foreclosed properties that are no longer producing income but still have a significant value.

The only way to determine this value is to either have a real-time database of the status of the makeup of the security or have one entity buy all the shares of any given mortgaged backed corporation, unbundle all the properties and sell them at market.

I favor the latter in a government brokered, private sector solution.

The government will NEVER fix enough mortgages to even come close to sorting out these mortgage backed securities. They will never be trusted in their present form. The longer these securities stay on the books, the longer the owners won't be able to sell them for enough to pay their own leverage on them. The result is that they will either need bailed out forever or the value of these securities will be determined in bankruptcy court. Hey...that's not a bad idea either.

MeYatch · Post by **MeYatch** » Sat Mar 07, 2009 5:32 am

I hate to reveal myself as in over my head, but isn't at least part of the reason your home has lost value is simply because it was over valued in the first place? I mean that's what a bubble is right?

jb31dtr · Post by **jb31dtr** » Sat Mar 07, 2009 5:52 am

Its easy to sit here and say that its all people buying over their heads that is cause of this problem. There are a few more things that factor into it. Do you think someone bought over their head just because they lost a job and then had to take a job at a big reduction in pay. Yes I know you say sell the house then. Well in this depressed market try to sell a house for anywhere near what a loan is worth. With so many out of work just try to find someone who can get financing to buy it.

I personally think of any of the so called bailouts this one should have been FIRST. Do something for the people first before making sure a bunch of rich fat cats can continue to be rich fat cats.

I've been laid off since August when JLG went in to tank and took my work down with it. Still making house payments right now even on lower unemployment. Try getting a decent job in this area right now, pretty hard when everyone is laying off not hiring anyone. What DOES piss me off with this whole bailout for homeowners is it seems to be easier for those that are behind to get all the help, not those of us who buckled down and just barely make it.

JakeWilliams · Post by **JakeWilliams** » Sat Mar 07, 2009 7:37 am

MeYatch wrote:I hate to reveal myself as in over my head, but isn't at least part of the reason your home has lost value is simply because it was over valued in the first place? I mean that's what a bubble is right?

The insurance company says my house would cost $170K to rebuild and it's in really good shape. I bought the house at $115K in '01 and put $20K (materials and labor) into it.

I'm getting screwed by the bank because they are appraising it based of of what I purchased the house for with minimal appreciation - and ignoring all of the things I updated, like windows, carpet, porch, deck, bay huge window and remodeling. They're ignoring any factor about the home that's not in their favor.

My house may have been overvalued at $160K, but if it costs $170 to rebuild and it's not that old, in relatively good shape, and many recent updates. An appraisal around $135K-140 should be a gimme.

Banned · Post by **Banned** » Sat Mar 07, 2009 3:25 pm

lonewolf wrote:All that does is reward bad behavior and fiscal irresponsibiity. So what if the property value dropped? The point is, they can't afford the mortgage payment they signed up for, so why should they get a standard of living that they didn't earn? This is the kind of policy that got us here in the first place.

I don't want to see one penny of borrowed taxpayer money go to pad the value of these $500,000+ properties that have significantly dropped in price.

What you are suggesting is an interest-free, open-ended loan.

If they can stand the test of a re-finance at a significantly reduced interest rate, that's would be a little more palatable, but aside from that...tuff titty...let the people who bought $2 million dollar properties over their head settle for $1 million dollar properties and the ones who lose the $1 million dollar properties settle for the $500,000 ones, and on down the line. There is plenty of reduced real estate to go around, so let the banks eat the bad loans they made. Don't adjust the house to the borrower...adjust the borrower to something they can afford.

That's how things get weeded out in a capitalist democratic-republic.

He said "tuff titty".....he he

CHICKSINGA · Post by **CHICKSINGA** » Sat Mar 07, 2009 4:54 pm

When 9/11 came down I lost my job for the first time in my career. (22 years at that time). I was in the middle of building my house. Everyone was getting laid off and jobs were scarce. I never let up and found a job - the worst I'd ever had. But I sacrificed and ate the horrible treatment and being poor. After the economy hit them I was low man (well woman) and laid off again. I enacted the same principles and ate my pride and found another crap job. Fortunately the market got better and the next jobs I found were better. Then I took a test to get a great job and made a 96% and got that job.
During the whole time NO ONE offered any bailouts. Those of us dealing with the crisis had to either pull up our boot straps, make sacrifices and work our asses off to get out of it or FAIL. I did the former.

In 2001 I was looking at losing everything I had worked so hard for. I had qualified for the loans, I put the money down, I chose a fixed rate mortgage. I was studied and aware of what I could manage. Once I got back on my feet I set about saving as much as possible to get me through it again if need be. WHY is that not the standard that we all should be held to? I realized then that I was possibly not going to be able to find jobs and succeed. I realized that I could lose everything. I NEVER felt that it was anyone’s responsibility but mine.

So - instead of becoming a Socialist Society where the Government will have all the power and wealth and we will become drones that have no human worth (China, Cuba & Russia) we need to fight the Government spending us into this. The Mortgage Crisis is the least of it. It’s not a Democratic or Republican thing any longer. It is a Constitutional thing now, people. We have in power right now a Regime that is dead set on taking our power by feigning “care” in it’s citizens. It’s a bold faced lie.

songsmith · Post by **songsmith** » Sat Mar 07, 2009 5:11 pm

lonewolf wrote:Most people mistakenly believe that this whole mess is because of the popping of the real estate bubble. The increase in mortgage foreclosures only revealed the real problem: poorly designed mortgage-backed securities that are impossible to place a value on.

Even if many of the at-risk mortgages are fixed, the problem still lies with the valuation of the mortgage backed securities. The only way to fix the problem is to either shed some light on the make up of these securities, or buy them all up and "unpack" them. This is something that the SEC needs to take care of.

The mortgage situation should be left to the free market.

+1
And losing 20-30% of your home's appraised value isn't as bad as it first appears. If your home was appraised during the bubble years, like mine was, it was basically over-valued in the real world. The internet bubble led to tech stocks being valued far over their real worth; when the bubble burst, those stocks found their true value as their actual usefulness emerged. Greed aside, there would be no reason for a property to appreciate 20-30% in 5 years, unless you struck oil. I bought my home to live in, not to get rich from. Even if it went to zero value, it's still a roof over my head.
In short, speculators, banks, and over-extended home-buyers all got greedy, and the current mortgage mess is simply the fallout from that. It's frustrating for those of us who approached home-buying responsibly, but there's little we can do once the poison enters the system. My plan is to ride it out and pay my tiny little mortgage bill on my tiny little house that I bought because it was in my price range.

--->JMS

bassist_25 · Post by **bassist_25** » Sat Mar 07, 2009 5:24 pm

Sobering words, Trace - and ones that I can't say that I disagree with. A lot of people bit off more than they can chew, and now the piper has come to collect. Getting a ten cent raise at McDonald's doesn't mean that you are qualified to go out and buy a half a million dollar home. Shame on the banks and lenders for pushing these loans, and shame on the borrowers for not doing their home work and then trying to live beyond their means. I don't make any major financial or life decision without doing my research first, whether it's taking a new job, buying a new vehicle, or even buying a new bass cabinet. I sure wouldn't sign the dotted line for a mortgage without giving serious consideration to what the future is going to be like or to the simple fact that I am an employee at will at my day gig; therefore, that gig may not be there in two years.

Of course, I'm not a materialistic person with to begin. The only really "status" material things I want are to eventually own a home...a conservatively-sized home, and to be able to purchase a vehicle that already doesn't have 80,000 miles on it. Maybe it's a "Can't lose what you never had" mentality, but owning a bunch of stuff that for which I don't have the wallet has never appealed to me. I'm 26 and still don't have a credit card. My education's the only thing for which I'm in debt.

Sorry...meant to just post that I agree with Trace for the most part and now I'm up on a soapbox.

bassist_25 · Post by **bassist_25** » Sat Mar 07, 2009 5:28 pm

songsmith wrote: My plan is to ride it out and pay my tiny little mortgage bill on my tiny little house that I bought because it was in my price range. --->JMS

Bingo.

Going back to my above post...when I was a kid, I would look around and see much bigger houses than mine in the neighborhood. I use to think that my nieghbors made a lot more money than my parents. As I got older, I realized that they probably weren't making all the much more than my mom and dad. They were just in debt, oftentimes, up to their eyeballs.

lonewolf · Post by **lonewolf** » Sat Mar 07, 2009 5:34 pm

This economic crisis will not go away until we deal with the $trillions$ of mortgage backed securities. Bailing out a few million homeowners as the economically clueless President Pelosi has proposed sure as hell won't do it.

Most of the MBS are held by large banks. Lets say that Banks A, B, C, D, E...n owns the bulk of shares of mortgage backed security corporations MBS 1, 2, 3, 4, 5...n

Bank A owns 60% of MBS 1, 20% of MBS 2, 10% of MBS 3
Bank B owns 50% of MBS 2, 50% of MBS 4 and 20% of MBS 5
Bank C owns 70% of MBS 6, 20% of MBS 5 and 10 % of MBS 3
Bank D owns....etc.

The SEC needs a task force to tabulate this information and get all the MBS shareholders (banks) to cooperate in a MBS swapping pool so that Bank A can swap its MBS 2 and MBS 3 shares for MBS 1 shares so that they end up with 100% of MBS 1 shares. Bank B would d the same for MBS 2 shares, etc, etc.

Once an MBS corporation is under single ownership, the single shareholder would dissolve the corporation and take ownership of the individual mortgages. Once unbundled, the banks could go back to handling the mortgages individually. The individual mortgages--good or bad--would immediately become liquid and marketable. Sure, they might have to take a 30% hit on 10% of them...but as I said before...tuff titty...welcome to American capitalism.

I would start with the very largest MBS corporations and work down from there. There would be some valuation issues, but since they are all "like" securities, that could be hammered out--especially if the government says "either play along or you're on your own."

The government would also need to play a minimal role in buying up all the "stray" shares, but its a hell of a lot cheaper than handing trillions of dollars to banks who already own trillions of dollars in real estate but aren't collecting any income from it.

CHICKSINGA · Post by **CHICKSINGA** » Sat Mar 07, 2009 5:50 pm

Thanks, Paul. I wish I was as realistic as you. I am not without credit, I can't say that. But I do my best to make sure it's paid and in good standing. Sadly I do understand how this all came about - I lived through it. I saw Presidents sell us on the ideal of success and Presidents sell us on the ideal of irresponsibility - the government will take care of you.

When I was growing up we had no insurance for awhile and it sucked. My teeth are in bad shape because I didn’t have a dentist until I was in 7th grade. My brother almost died of bee stings. But my Dad worked his balls off to pay the bills we made and it meant sacrifice and our extended families coming together to help each other. Growing up that way taught me to persevere instead of whine and wait for the Government to figure it out.
Sadly later in life my parents did glom on to too much government intervention and the quality of their lives suffered greatly for it. I was on my own by then.

Jimmie Carter had this country in a hurt, BUT it was probably more realistic than the world that Ronald Reagan proposed. I don’t think either was bad. I see worth in what they both brought to our country. What happened beyond those years was hyper greed and jealousy of those who had by those who had not. Earning things became a notion undermined by the facilitation of “fairness”. Capitalism got built on unrealistic credit. There is no one faction at fault – it was cumulative on both sides. It is Human Nature. But the route that we are going now as a people to plug the dyke (ok you gutter-minded – don’t) is the worst possible scenario.

I wish more than anything that we as a country would do the things necessary, no matter how hard. Let some banks fail, let people learn hard lessons from their mistakes, illegals – OUT. (they are constituents for these crap politicians) Tax fairer across the board – no more big deductions for more than one or two homes, no more earned income tax credits – better yet level tax percentages on all – flat tax. Give Tax credits to Employers that fund healthcare for their employees. Keep assistance for those who really need it. No more welfare after the 2nd child. Work SOME kind of job for welfare, clean the streets. Better audits on Medicade and Welfare to cut back on abuse of what has become industries in themselves.
But most of all embrace each other and help. If they take out Tax credits for charity how many Oprahs will be philanthropic? Aye, there’s the rub.