Wednesday, February 18, 2009

The Right Way to Deal with the Mortgage Crisis

After today's announcement from President Obama, introducing a plan to save those homeowner's who are facing foreclosure, it has become apparent that despite all the good intentions of this administration they just don't get it! The current proposal would apparently look to help distressed, non-performing homeowner's with a government incentive that would allow banks to restructure the debt of these delinquents, tailoring the debt payment to a nominal 31% of their income.

What is wrong with this picture? We are validating behavior that was basically imprudent at best and fraudulent at worst! Many of these homeowner's (more rightly they should be called debtors in possession) were unscrupulously lured into their present condition by easy money made possible by Greenspan and company's loose credit. Greedy and unregulated groups of mortgage originators, banks, packagers and rating agencies "gone wild" also contributed to this excessive liberal credit binge.
But ultimately aren't we all responsible for our own choices? No one held a gun to a borrower's head and made him sign the papers.

I am often amazed that the normally fiscally conservative groups that look to free market capitalism when things are good are so quick to give up on Mr. Market when things go too far off course. How do unspecified tax cuts help us out of this credit crisis? But we must jump start the economy and tax cuts are the way to go we are told. I don't see the connect if after all the recent tax cuts we have had we still got into the present situation.

If big auto is too big to fail, big banks like Citi and B of A are too large not to be saved and insurance giants like AIG that basically insured beyond their ability are too intertwined into all aspects of the economy to be allowed to be broken up and dissolved in an orderly fashion are not these free market advocates taking the next step into socialism?

Don't get me wrong I believe we need government intervention in these troubled times to set the boat right and start to steer away from the shoals of the economic abyss we let Wall Street and others steer us into, but intelligent, fair and measured government intervention laser focused on what started this whole crisis the housing bubble. Houses have escalated too far too fast and now they need to be adjusted to more realistic values. This will take time for people to adjust to and it will not happen overnight. Nor can we afford for it happen as it has in some of the most high flying markets where values have plummeted precipitously some 30 -40%.

Every time we reward corrupt and failed business policies or personal financial impudence to be bailed out by our tax dollars we do nothing but encourage the repeat of this abysmally aberrant behavior. What reinforces unacceptable behavior more than the tolerance and encouragement of such behavior. When we now turn to government to save those of us who made imprudent decisions we are in essence validating this reckless behavior. How is it fair that for those of us who have consistently driven in between the lines, lived our lives in moderation, paid our debts, sacrificed vacations and luxuries, worked multiple jobs or overtime if necessary to make ends meet, now be called upon to take responsibility for those who ran in the fast lane, skimmed all the cream of life, lived beyond their means and left the bones of the economic abyss for the rest of us to manage to get by on?

This is patently unfair and potentially divisive and incendiary. We are told we can't afford to let this get out of hand or it will take us all down with it! We must act now with premature thought, and willy-nilly policy and cast all are available resources at this problem swiftly and with little regard to the future consequences because to do nothing is too flirt with catastrophe.

I believe a fair and measured approach that focuses on housing makes more sense and has the potential to do more immediate good. I propose that instead of bailing out failed or failing homeowners, which does little to actually stimulate the economy, the government, in cooperation with the banks that they virtually now control, force the banks to restructure all existing mortgages of owner occupied single family dwellings. Both performing or non-performing. They could basically subsidize the lowering of interest rates to say 3% or 4% for these instruments across the board with a simple application. This would serve several purposes.
1) It would be fair and not simply reward those who were delinquent and in trouble.
2) It would allow those existing mortgage holders to reduce their monthly payments and would stave off further delinquencies. It would ameliorate some of the foreclosure problems that now exist and will likely prevent some foreclosures that may be imminent.
3) The additional disposable income for those who do not need the reduction could be used to stimulate the economy through increased spending and or redirecting these monies to other needs like the purchase/lease of a new auto, financing of educational needs or simple retail purchases. In the event that a large portion of people save this money it could be used as additional capital infusion into banks and could help loosen lending criteria for new business.
4) Any and all performing loans would not require any credit or income verification, would be made only up to the existing outstanding principal loan amount and would simply be re-caste with the new rate with no further requirements, no reappraisal, and moderate fixed closing costs.This would likely make it more universally accepted and at a minimal cost to the homeowner.
5) These re-financing's would create immediate work in that sector which is presently in distress.
6)It would reinforce the notion that while we need to correct this imbalance caused by excess we do not just reward excess at the expense of commitment and industry that are the backbone of a stable economy.
6) It would create good will and foster a positive outlook which will restore confidence in the system and our leaders.

While I am sure there are obstacles to such a plan I believe this kind of approach has a better chance of working to stimulate our economy and hold back the current of the present economic slide. It should also be welcome by a majority since it favors no one and shows unbiased fairness.