Credit And Housing Markets Solution

Discussion in 'Current Events' started by JimofPennsylvan, Jan 24, 2009.

  1. JimofPennsylvan
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    JimofPennsylvan VIP Member

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    Its crystal clear Washington needs to fix America’s credit markets and solve the nation’s foreclosure problem. To fix the credit problem, the toxic assets have to be taken off our nation’s banks books and they have to be appropriately injected with capital. As for the latter capital injection, the task is obvious, the Treasury and the Federal Reserve Bank are going to have supply it. Getting toxic assets off banks books and bringing about an end to the flood of foreclosures present the bigger but surmountable challenges. In solving these problems the government must zealously adhere to the principle that the bill to fix these problems is not going to be stuck on the U.S. taxpayers which is doable if the government acts with wisdom and character. In crafting solutions to these problems, the government should utilize the fact that the problems are linked, e.g.. many of the mortgages that are in danger of foreclosure are owned by the banks and held in the form of what is called “toxic mortgage-backed securities”. Another thing the government should keep in mind is that no one can know the total economic losses from all the toxic assets on the nation’s banks balance sheets, God himself couldn’t come up with the numbers because of the variables involved, so put off the complete reconciling of this bill to the banks until ten, fifteen, twenty years or the like from now when these ultimate costs are known. Another thing the U.S. government should remember is that it has enormous power over banks (e.g. their recent actions with Citibank, Bank of America and Washington Mutual clearly show this) it should use that power boldly to solve the industry’s problems for the America people not cowering to those that have vested interests in this industry. On the home foreclosure crisis, large portions of the American people and especially leaders of the American people are going to have to accept that quite a high number of American people are going to have to lose their homes because they cannot afford them even with helpful (responsible) government programs in part because they should not have been given their loans in the first place because they could not afford to pay them back and in part because of their permanent wage losses (because of their recession job losses) which causes them to permanently no longer be able to afford their home; Washington needs to be focusing its efforts on creating the environment where these houses can be sold and the displaced Americans can find new housing in what would be described as in a good and expeditious manner.

    On the removal of toxic assets from banks books problem, the government should pursue the oft-mentioned “Bad Bank” idea. The bad bank idea consists of the following. A Bad Bank is created by the government and the government gives it a stake of like $200 billion dollars and authorizes it to sell U.S. government backed bonds so it can raise more money to fulfill its function of taking toxic assets off the nation’s banks books. Government Regulators go to each bank in the nation’s banking system, and with or without the assistance of the bank’s executives, identify toxic assets (or assets in real danger of significant devaluation or causing significant monetary loss to the bank) and bring in the Bad Bank to take these assets off the banks books; the Bad Bank does this by buying the toxic assets from the bank or in the case of assets which are more likely liabilities, like swaps, putting limits on the banks liability. With respect to the commonly raised issue of banks capital levels falling from this action, the government should handle this problem in the following matter. Say a bank has toxic assets with a book value of $5 billion and the bad bank values these toxic assets at $2.5 billion dollars, the bad bank gives the bank $2.5 dollars and buys preferred shares in the bank for the balance of the book value which in this case is $2.5 billion dollars with the yearly interest rate being .75 % higher that the rate the Bad Bank pays on the bonds it issues to raise money and in any event 5.0 % maximum, in this way the bank has the same amount of capital, essentially, in other words –the bank is always being made whole. Morover, to alleviate the pressure on the bank from paying the interest on the preferred shares, permit the bank at the banks discretion to postpone the interest rate payment on these preferred shares up to seven years and to avoid the public being taken advantage of require that the bank can’t increase the banks shareholder dividend or top executive compensation above the inflation rate during the postponement time. In addition, five, ten, twenty years from now when the Bad Bank knows definitively the actual value of these toxic assets, if the actual value exceeded the paid value for the assets by over fifteen percent, the Bad Bank will pay this exceeded amount to the bank – if the actual value is below paid value the bank pays nothing to the Bad Bank. In regard to the Bad Bank’s challenge of valuing these toxic assets, of course the Bad Bank will try to fairly and accurately determine the practical value of these assets, nevertheless the government needs a mechanism so U.S. taxpayers will not get stuck with the bill paying for these toxic assets and this mechanism is bank equity, recent government initiatives have pursued stock warrants as the means of getting equity, this means suffices. The bad bank should take, subject to bank regulators approval, an amount of equity to insure that the bad bank doesn’t lose any money in this cleansing of the banks books and a premium to pay for this whole rescue of the financial industry that has been going on over the past year and clearly is only part way complete. The premium will be set at a maximum of a banks overall equity of something like 5% for big banks, 15% for middle size banks and 33% for small banks. With respect to this non-premium equity when this five, ten, twenty year “account reconciling” date comes, the Bad Bank can return to the bank any non-premium equity in excess of the value that the Bad Banks needs to cover the costs incurred to cleanse the bank. With respect to toxic assets that are likely liabilities like swaps, the bad bank can do a Citibank and a Bank of America type of solution to these problems limiting the banks liabilities and again the Bad Bank will be getting equity from the bank to cover the ultimate losses it occurs with such assets.

    The one thing that the U.S. government regulators should do immediately and there has been an abundance of commentary about doing it long term, is put immediate restrictions on banks entering into swaps of all kinds whether it be credit-default, currency or index swaps to name a few. Swap investing holds such financially devastating potential liability for a bank; what is the point of recapitalizing the nation’s banks if they quickly become crippled again engaging in such dangerous activity. It would be ideal if such swap activity could be banned outright, nevertheless, it should at least be limited in so far as the maximum liability a bank is permitted to potentially incur in overall swap investing and on an individual swap. Specifically, the limit should be like a bank is not permitted to hold swaps that pose more of a potential liability than fifteen percent of the capital that a bank can afford to lose and still be a bank in good standing; and on an individual swap, the terms of the swap must maximize liability at twenty percent of whatever the swaps measure is, if it’s a credit default swap the counterparty’s liability is limited to twenty percent of the value of the bond or loan, if it’s a currency swap when the currency drops twenty-percent in value that is the limit for generating liability, etc.. The reason for the former restriction is obvious and the latter for, in part, to protect banks financial stability (history is showing one groups of swaps going south can dramatically affect the well-being of a bank).

    On the foreclosure crisis problem do the following. The specific problems on this matter are that lenders are not modifying their mortgage loan agreements in a satisfactory matter. High numbers of mortgages are not being modified at all. On other mortgages, the modifications are producing a monthly mortgage payment that is too high (onerous) and thus unaffordable. On some mortgages, the borrower is so underwater (loan principle owed higher than the value of the burrower’s house) even with the modification there is no incentive on the mortgage burrower not to default on the loan. On many loans, the loan service provider does not have the authority to modify the interest/principle terms of the loan. As referenced earlier there is no responsible solution that isn’t going to see a significant increase in foreclosures over the next year because some borrowers can’t afford their homes the government should just be seeking here to see the nation through this adjustment period quickly, like twelve months quickly, and get the housing and the connected home construction industries operating normally again.

    The solution here is to essentially implement a program idea created by the FDIC, which is have the government create a program where if lenders will modify their loans in a favorable manner the government will split any ultimate principle loss the lender will experience on an ultimate default on the loan. The appeal of this program is not only the loan insurance qualities of the program but also that it will produce affordable monthly mortgage payments for borrowers, immediately or quickly give them equity in the property and as best that is possible tries to compensate and reimburse lenders for the monies they lent the borrower with respect to the loan. The government pays for this program by giving this program a stake of money and giving the government unique equity rights and taxing rights with respect to the homes that enter this program which will allow the government to funnel monies coming from these rights back to the program as the program needs. One key element of this program is that it will require lenders to make a loan modification that results in a monthly mortgage payment that is no greater than 33 % of the borrower’s current income (or an adjusted income for qualifying borrowers). The consensus amongst the experts seems to be that this is about the tipping point where mortgages higher than 33% tend to be unaffordable and result in high rates of delinquency. Another key element of the program is that participating loans have to be modified so that the interest rate is fixed otherwise borrowers will experience interest rate resets and thus increased monthly mortgage payment increases and history tells us this causes mortgage defaults. The program will require the lender to waive all past late fees and late penalties incurred prior to entering the program however the borrower will still be liable for any past unpaid mortgage payments that involve interest and principle payments. The program will guarantee that participating loans will be modified so that the borrower will be guaranteed at least thirty percent of the profit when the home is sold. The maximum term on participating loans after modification will be forty years. The program must come up with fair numbers on what consists of fair late fees and penalties and make it mandatory on participating loans. The program must require that on loans where the principle amount is greater than ninety-five percent of the value of the property the lender reduce the loan principle amount down to this ninety-five percent value figure.

    The program should come up with different set types of loan modification formats. This is part of the crucial value of the program, lenders will have to select one of these set types of loan modification formats which will have fair terms so that everyone is insured there is a fair loan modification agreement being put in place. On all types of loan modification formats, the U.S. government is granted twenty percent of the profit when the home is sold (and no equity by the borrower can be taken out of the home for ten years from the time the loan enters the program and once that action by the borrower occurs this twenty percent of the profits figure is due with the market value of the property at that time being used to compute the profit). One type of loan modification format is the “principle reduction” format, this is the type where the lender forgives the portion of the principle above ninety-five percent of the value of the property. The lender is compensated for this by the program giving the lender a percentage of the profit from the property when the property is sold. This percentage is the percentage of the amount of the principle forgiven compared to the market value of the property to a maximum of fifty percent of the profits. Another type is the “interest reduction “ format this is the type of where the lender reduces the interest on the loan. The lender should be compensated for this by giving the lender a percentage of the profit when the property is sold. The lender’s percentage should be the percentage of the present value of all the interest monies that the lender is giving up over the course of the balance of the loan if the loan agreement was enforced as originally written compared with the current value of the property; for adjustable rate mortgages the government should come up with some average from the history of the U.S mortgage industry for computation purposes.

    One important catch for this whole program is that not every borrower will qualify. Only borrowers will qualify where the monthly mortgage payment on the modified mortgage does not exceed thirty-three percent of the burrowers current income (or for qualifying burrowers an adjusted income figure) or if they meet the theoretical requirements which are on a mortgage consisting of an interest rate of 4.5 % fixed, a 40 year term period and a principle equal to ninety-five percent of the present market value of the borrower’s home the resulting monthly mortgage payment does not does not exceed thirty-three percent of the burrowers currently monthly income (or for qualifying burrowers an adjusted income figure). An adjusted income participant could be one where the government sets up the following program. For middle and lower economic Americans the government could subsidize their mortgages under the following conditions. One knows that with inflation incomes will increase over time and inflation generally runs around 2.5 % per year so using that 2.5 % figure compute what that burrowers income will be at five years from now and use that income for the threshold analysis. Of course in order for the program to work, the government will have to pay the lender the difference between thirty-three percent of the burrowers actual income and the required mortgage payment for five years, but beginning in January 2011 on a yearly basis the government could require all borrowers to re-qualify and probably many burrowers will have incomes that increased sufficiently so that the required monthly mortgage payment will not exceed the 33 % of their current income so these borrowers will no longer need to be subsidized. For layed-off burrowers the program could defer final decision on their acceptance into the program until after the borrower gets a full-time permanent job in his or her field.

    Another catch with this program is one designed to address the fears that people across America will just start not paying on their mortgages to avail themselves loan modification benefits of this program. The catch is that if a borrower participates in the program, when the borrower sells the borrower’s home the capital gains tax will be increased by fifteen percent, if the borrower is not eligible for the capital gains tax there will still be a fifteen percent charge on profits going to the government and even if the borrower just rolls over the property there will still be this fifteen percent charge on profits.

    The final major points are that if the government through the Bad Bank initiative acquires large scale ownership of mortgages through the toxic asset purchases the government can just mandate the mortgage service lenders servicing these loans participate in this “loan modification with back-stop” program. Moreover, with respect to the banking, investing and loan servicing entities who have thus far been unable or unwilling to put together good loan modifications, the government (and I am sure it would sail through Congress) can just mandate that the foreclosure process is not open to any lender whose mortgage is eligible for this program and whose burrower agrees to the program. Such actions should bring about large-scale good modifications to troubled mortgages in America and solve America’s problem here.
     
  2. RodISHI
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    RodISHI Gold Member

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    Bailing out bad banks simply a bad idea. You cannot make it a good idea regardless of how you put it.

    For one these banks fluffed many of the papers to make these toxic loans they supposedly have. It became to easy for them to do it. The Real estate industry assisted and even the local assessors proliferated the problems as they included their cut in the mix.

    If you really want to solve the mess these banks and insurance companies created let them fail. Pick up the pieces as they fail. Get some real live auditors into their books and start looking at the creative accounting practices they used to inflate their bottom lines.

    Jail the perpatraitors and strip back the multi million dollar saleries they paid themselves off these overly inflated profit margins they proclaimed in the last 10 years.

    Do not forget to nail them for all of the erroneous 1099's they have claimed as writeoffs while your at it.

    Set up credit court specifically to handle the claimed bad loans. Use ethical asessors and credit managers to assist homeowners that were burned by the practices used to inflate the cost of their mortgages and over valued homes.

    Look back into the scams that companies such as Orix and Wells Fargo have used stripping the wealth from small investors. Repare the damage done to these investors with the money recovered from these over paid thugs who have created this mess.

    Put SBA back in control of the federal employees and take away this bullshit preferred lender status that has been given to these modern day mobsters.

    Use the small community banks that have invested wisely to build back the economy.

    Any bank that is caught in fraud nail them to the wall as an example to any who might come after them wanting to follow in their footsteps.

    Put money into the working mans/womans hands. Reprogram the people to save instead of living off of credit cards.

    If any company cannot succeed on their own merits in an ethical, legitamite business they do not belong in business.

    Raise the minimum wage. Wages have in no manner kept up with the cost of living. It is so imbalance an average family cannot survive with two parents working.

    Put money into revamped CETA type programs to encourage employers to train or retrain people and help them get back to work.

    Open up more state and federal contracts for true small business enterprises. A small business of ten employees and a million a year cannot be compared with a business of a hudred employees and twenty million a year. Just as a small mom and pop three employee business cannot be compared with either of those.

    Give tax breaks to companies bringing in certain class manufacturing jobs. Tax the shit out of companies that have close shop in areas throughout the states only to move to asia and ask the former employees to go train their new employees.
     
    Last edited: Jan 24, 2009
  3. toomuchtime_
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    toomuchtime_ Gold Member

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    Alternatively, the federal government can set up an agency to insure loans to businesses and consumers, charging a premium based on risk, thus removing the risk from lending so that banks and other financial institutions begin lending freely again and companies can begin investing again and consumers can begin buying houses and cars again and rescue us all from from this recession. Then we can begin to lock people up and thinking up ways to try to prevent this from happening again.
     
  4. Chris
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    Chris Gold Member

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    I have been a realtor for years, and I have never, ever, had a problem getting mortgage money for my clients.

    There are literally thousands of solvent banks in this country.

    This whole thing was a scam to raid the Treasury.
     
  5. RodISHI
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    RodISHI Gold Member

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    Here's the deal. The feds giving big banks federal insurance just gives them more reasons to loan on "Blue sky". These guys have become so accustom to thinking our dollar is theirs they forgot that there is a penalty for making erroneous documentation.

    Heck from what I have seen in the last 9 years it does not cost them a dime for creative accounting, altering docs, erroneous tax records, "guessing" account balances, "guestimating" loan assets, counterfieting and shorting loan funds. In all of that they get to charge the feds a fee for their lovely services. When they get done running the borrower and the borrowers family through the shit pond they make a request for that gaurantee.

    Shoot even the small banks have picked up a few of those pratices (personal experience I cannot disclose)

    If the feds really want to straighten out this mess they assisted in making they need to get serious. Restore the regulations immediatly and get this shit stopped.

    Put the money directly into work programs and tell the banks get their shit together or belly up and get into bankruptcy court so the feds can get fully involved.
     
  6. toomuchtime_
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    toomuchtime_ Gold Member

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    If the government set the premium for the loan according to the risk involved, a high risk loan would carry a high premium which the bank would have to pass on to the borrower in the form of higher interest rates which would discourage most of these high risk borrowers. This mechanism would protect taxpayers from taking too big a hit while also freeing up credit for business investment and consumer spending, thus protecting jobs and perhaps spurring new growth. I've got to believe our priority should be recovering from the present recession by stimulating the private sector economy and not locking up bad guys.

    Greed and corruption are always present in government as well as in business, what got us in trouble this time is that well intentioned government policies, primarily Fed policy, made greed and corruption much more profitable than usual. Low interest rates meant cheap mortgages which increased demand for housing driving up property values allowing banks to make money on mortgages that carried lower down payments because a foreclosed on property would probably be worth more than the value at purchase. As long as property values continued to go up, high risk loans were good business that allowed some consumers to buy homes who otherwise would not have been able to and the banks would retrieve enough from the higher price of the houses they had to foreclose on to make even these loans profitable.

    Derivatives of various types were sold on pools of these mortgages to raise more money to sell more of these profitable mortgages and as long as property values continued to increase, everything was fine. When the Fed finally raised interest rates because of inflation fears, mortgage rates increased, driving down demand, which lowered property values and this made the mortgages less profitable since the value at foreclosure would now probably lower than the value at purchase, and the falling values of the mortgages drove down the values of the derivatives and so many of these were held by major financial institutions that this produced an almost instant credit freeze because the market for these derivative was now only about $.20 on the dollar and by this measure of their assets they already had more loans outstanding than they should have. To make matters worse, by the time the Treasury had put some money into the banks, the real economy was clearly in a slowdown making everyone and every business a higher credit risk, and the banks quite properly became very cautious about making new loans.

    We can point fingers at greedy bankers and bond rating companies and Wall Street firms that created these derivatives, but the fact is that without the Fed trying to manipulate the economy, none of these would have had the opportunity or incentive to do the stupid things they did. This is the second Fed created bubble to burst in less than a decade, and if we want to try to prevent this kind of thing from happening again, we should begin by examining the Fed policies that created this one.
     
  7. RodISHI
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    RodISHI Gold Member

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    Bad idea. There is no excuse to add another uneeded expense to home ownership. That would hurt more than help.

    Taxpayers should have never have taken a hit for the ignorance and greed by the bond and banking industry. So it is obvious self regulation does not work.

    If you truly what new growth quit regulating the average Joe into oblivion.



    While these guys are going scot free a full blown new set of ideals were formed. "Screw them before they screw me".

    When corporate criminals are allowed to run amok this is what you have. It is a complete lack of respect for any system. One cannot have confidence that their is a light at the end of the tunnel if you keep moving the light farther away.

    If someone does not get a line on the banksters fairly quick you'll see this country take a fall that will be far beyond the crash of the twenties.

    Like they did not know it when they were doing it!

    Are not we supposed to be working to improve justice and equality not proliferate corruption.

    You cannot just keep blowing a balloon eventually it runs out of air space.

    The average wage has not kept up with inflation.

    Everyone should be able to at the very least afford some sort of decent housing when they work.

    Insurance of every kind is the biggest drain this society has. On a whole they simply need to go away with the banking industry for they are as corrupt and by the way also infilitrated with banksters. We cannot be just a country with paper shufflers it won't work.

    And every added their cut in there along the way.


    Not exactly. See out here in the real world banks were loaning on "Blue sky", "Paychecks", "Employer promises", inflated values (which by the way they pick the appraisers), a lot of switch and bait tactics and so forth. Why go on.

    When the gas prices inflated it dumped both employers anmd employees into the maze of shit to swim in. Credit card companies have been gouging consumers for every 45 bucks they could add on, heck sometimes twice in one statement period. Amazingly they can delay sending out a statement and turn a ten dollar payment into an 85 dollar overcharge. They can then start piling on the interest and then send nasty gotcha notes and ring your phone several times a day with their lovely collection threats. (sure there are consumer laws that are purportedly out there to protect the consumer but shit who has time for all that crap when you are being buried everyday in trying to survive it all)




    No doubt they need to make an examination of themselves because eventually they just become targets for the nutcases that take justice to heart and apply it with force.

    Oh and it was not just the greedy banksters. Many of them sure have led the charge in greed and corruption as an American calling card for her citizens.

    If the fed truly wants to see people have a chance and home ownership they need to let the banks go into bankruptcy. These guys got them sweet bankruptcy laws like they wanted them a few years back. Let's see if it works for them as good as it has work for those people they worked so hard to force into bankruptcy.
     
  8. editec
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    editec Mr. Forgot-it-All

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    Let me get this straight.

    Banks had been given the right to lend money THEY DID NOT HAVE at interest.

    But they lent out money (they did not have) foolishly because by doing so they endentured people to pay far too high a price for real estate they could NOT afford to begin with.

    And we want to save these bankers and the bond holders of those banks why exactly?

    So they can do it again?

    Here's a thought...

    Since the money we have been borrowing from these banks has been entirely ficticious to begin with, why not just allow the government to become the LENDER?

    The Treasury is just as capable of lending money it does not have (but can invent) as the private banks could.
     
  9. toomuchtime_
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    toomuchtime_ Gold Member

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    An auto dealership near me just had all its new car inventory hauled away by the manufacturer because he could not find financing for custormers who wanted to buy them. Many of the jobs at this dealerships at this dealership are now lost. If the government had set up a mechanism for insuring loans to these custormers, these would, in effect, have been no risk loans and plenty of financing would have been available and these jobs would have been saved. Nothing in your posts seems to address this kind of bread and butter issue anytime in the near future. Even if eveything you say about the system is true, without taking action to free up credit, jobs like these will continue to be lost which means tax revenues will continue to fall which means the government will be able to do less and less to relieve the pain this recession is causing.
     
  10. garyd
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    garyd Senior Member

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    Fist by federal law the banks must have a certain percentage of cash on hand enorder to loan x amount of dollars.

    2nd to blame the banks and mortgage companies for this is to fail to realize that much of the blame for this debacle belongs in the hands of state federal and local governments who between zoning codes, zealous witch hunts for predatory lenders defined almost all the time as people trying to cover their asses against toxic mortgages that government rules and regulations required them to make in order to stay in business and not dance with lawyers daily and with quasi government agencies to back them the mortgage companies were simply operating out of a very leaky boat designed and built by government bureaucrats that was by 2000 so dependant on ever increasing home prices that even a small down turn in the housing market guaranteed a disaster. Add mark to market to the equation and suddenly you've got the bigger mortgage companies having to capitalize losses that in fact in some markets didn't truly exist.

    There hasn't been a free market in real estate since at least 1975 and there has never been a time in the last 70 odd years,when there were no real estate regulations on mortgage companies.
     

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