One further economic thought:

Further to my thoughts about economic recovery, here is a thought about the housing mess. While there are many facets to the problem, and therefore several solutions will need to be addressed, I think this a good solution for a portion of the problem.

In short, there are huge numbers of people who are living in their houses, and who want to continue to live in their houses, but are experiencing a set of similar circumstances. They are under water, i.e. the home is worth less than the value of the mortgage attached to it, they are in a subprime, adjustable loan, they have the ability to prove their income, but don't have enough savings to pay the difference between their mortgage and the new value of their home, and are therefore locked into a bad mortgage situation.

Therefore I humbly submit: for deserving borrowers (they live in the house, seek to REMAIN in the house), have them qualify (prove income documentation) for a fixed rate, 40-50 year amortized loan at a rate they can afford, and modify the note, or originate a new one. Participation in the program would have to require a period of time where the borrower would be required to stay in the home after the note is modified.

This program would be sponsored by Fannie/Freddie, and would therefore be considered to be "Agency Paper." Which would allow the instruments (which now will PERFORM at a much higher rate - typical to standard A-Paper loans) to be sold on the standard secondary markets where Fannie and Freddie live, and lenders would be open to modifying or originating a lot of these types of loans. Essentially any market in the country that has had an active residential construction market over the last 7-10 years will have a multitude of these types of borrowers.

There are also undeserving borrowers in this situation. They will not, and should not, be helped out of the mess they made for themselves. They bought the house on a nasty interest-only, or negative amortization loan, with only one goal: speculation. They possibly have more than one home in this situation, or at least have a credit history that shows this type of activity. During the process of discovery, there will become apparent several nefarious activities, and they should be prosecuted as well - these include mortgage fraud (by both/either the borrower and the mortgage originator), appraisal fraud, realtor fraud, builder fraud (like mortgage kickbacks), etc.

Those people will, and should, be held 100% responsible for their actions.


Tom said...

You're still faced with the trouble that upside-down lenders may (and do) threaten to walk out on their mortgage if the bank doesn't reduce the principle.

Why wouldn't a customer-serving bank not explore this option (so long as it's doing write-downs). Why couldn't banks employ the 40+ year mortgage option you suggest on their own, without federal intervention? (Never mind the ridiculously high interest payments that would go along with such a plan.) ... Why does government have to be involved at all?

That One Guy said...

Tom, you're absolutely right - why WOULDN'T a customer-serving bank explore this option....?

The answer becomes more obvious every day: it's because they AREN'T customer-serving banks, they're SHAREHOLDER- AND SELF-SERVING banks.

Banks have asked for, and taken, bailout money from the tax-payers (their customers), and instead of implementing responsible policies to serve their customers, they have KEPT the money to shore up their balance sheets, produce a fake positive cash position, and pay obscene executive bonuses. All these items serve only the shareholders, and themselves.

Until the banking industry sees and corrects this basic disconnect in their operations, we won't see any significant benefit coming from banks themselves toward their REAL customers.

I don't think there is ANY bank out there doing an aggressive and significant program of loan mods and other customer-serving options out there. Not at all. Right now, banks are as likely to walk away from non-performing assets as consumers are likely to walk away from a loan in which they are totally upside down.

And Tom, thanks for being here, and leaving your thoughts. I'm enjoying your blog as well.

Tom said...

I see you've noticed I'm exposing my particular management biases. Namely that in the long run, an interest in profits and shareholders should, in most instances, mean an interest in the welfare of customers.

I can understand a bank's reticence to publicize mortgage principle reductions--they'd potentially lose revenue from people who are willing to pay higher amounts. ... so maybe more of this is going on than we realize. Maybe not.

That One Guy said...

Absolutely, the interests of shareholders and customers should align. And I think that, by and large, it did before everything got out of hand - at least in the finance industry.

I think it would be easy for a bank to protect its interests in doing loan modifications by simply implementing a set of strict guidelines that must be met in order to qualify for a loan mod.

I frankly think that there are very few of these happening. I saw some numbers three or four months ago - and they were really small numbers. I'd be interested to get a picture of whether there is significant activity in this area now.

As you expose your management bias, I expose my total incredulity with regard to most publicly traded companies being managed toward the quarterly 10-K earnings numbers to the detriment of long term growth results and customer-based policies. At least that's my feeling for the last 5-7 years.

As long as executives' income, whether regular salary or bonus, is linked to share prices, the disconnect will remain. Banking execs have shown that their greed will allow them to flush the interests of long term managed growth and results, in favor of short term, quarterly earnings reports. They don't understand that they are throwing the baby out with the bathwater.

In my opinion. :)