Thursday, August 5, 2010

Mortgage Workout Plan Revised

I first published this plan in this blog on January 20 2009, inauguration day for the new President. Since then the economic crisis has become immeasurably worse in all respects.

It is not arguable that housing prices are down 30%-50% from then; that the US deficit has hit the unprecedented level of $1.5 TRILLION and climbing;that consumer confidence is in the toilet that economic activity worldwide is decling rapidly; that welfare payments are rising to unsustainable levels worldwide;that harsh and punitive tax increases are being threatened in the USA;that the unintended consequences and uncertainties of new legislation are squelching the recovery of profitable, sustainable economic activities.

We face rising unemployment and the very real threat of deflation or what is worse a government induced runaway inflation.

This morning I drew your attention to the shot across the bows of the sinking ship USA fired by China. They are telling us in plain terms that inflating the dollar will not be tolerated. Dont believe for a moment that they have not already cornered a very significant share of gold and stockpiled natural resources and bought up resource and precious metals producers around the world just because they are short of these resources!

Certainly not! The Chinese KNOW that a confrontation with the USA is close.

The first week any Business School student hits the classroom is devoted to learning to correctly diagnose the problem.

Well: the thing that broke the banks in the USA and therefore the world, is mortgage securitazion run amok. The reasons for this are well analysed.

So: It is the DUTY of Government here in the USA, where the unwritten constitutional right to home ownership enshrined for decades in the tax code, to identify the problem, and fix it appropriately.


Home prices must be returned to an upward trajectory.

Here is how to do it:(reprised and updated from January 20 2009)
Tuesday, January 20, 2009

A Mortgage Workout for the People of the USA 1: The Plan

This is a plan to help every citizen of the USA whose current mortgage obligation exceeds the value of their primary home.

Principle no 1: No household should pay a housing cost (mortgage payment: principal + Interest only) that exceeds 30% of their gross income( before any deductions) as reported on their latest Federal Tax Return.

Principle no 2: The Federal Government will refinance through Fannie Mae and Freddie Mac or directly through the Federal Reserve Banks (buy existing mortgage and reissue a new 1st and 2nd mortgage to homeowner) existing mortgages for homeowners who are under water with their mortgage on their primary residences.

Principle no 3: New mortgages issued under this program, based on household ability to pay, will contain a provision that allows FNMA/FHLMC/Fed Reserve Bank to recover, on sale of such re-mortgaged property, 80% of the difference between the nominal value of the new mortgage issued and the then sale price of the property, until full amount of original refinanced mortgage is recovered. These agencies will be allowed to charge a 0.5% fee in addition to 30yr treasury rate to cover cost of implementing program.

Principle no 4: FNMA/FHLMC/Federal reserve Banks will be allowed to continue to repackage these new mortgages in CMO’s etc for resale through traditional resale channels.

Principle no 5: These newly issued mortgages will be transferrable to other citizens who meet the income qualifications to assume these mortgages provided they are to use the purchased home as their PRIMARY RESIDENCE.

The next 3 parts follow.

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