Any Homeowners Bailout Will Be Unfair

The title above is important context for this post. No matter what the final combo of acronymed facilities, stimulus programs and the like, a homeowner bailout will not be fair to everyone.

First, a slightly more serious point. There has been chatter about refinancing mortgages to 4.5%, but then the chatter moved to talk of 3%. This would create a lot of problems (well, maybe not for the borrower). Lending a bunch of money for 30 years at 3% exposes lenders to interest rate risk. What happens when rates go back to normal? Any bank loaded down with a bunch of 3% debt that is unlikely to refinance away will face a whole new set of writedowns when rates go back to 6 or 7% -- or higher. It would seem to me there would be all sorts of problems for banks and other lenders putting out that much money at 3%.

I don't know if securitization is now supposed to now be dead, but assuming not, how eager are you to collect 3% for ten years, oh wait no I mean 30 years? Three percent would seem to be a problem at many stops along the food chain, and so I doubt it will happen.

Now for my not so serious idea: Scrap all of the acronyms and stimulus plans now in motion or on the drawing board. According to this there are 44 million mortgages out there. Why not structure a program that earmarks every mortgage be reduced by $100,000 and then refinance every mortgage based on the new principal amount at the same interest rate already in place for the specific mortgage?

If you have a $400,000 balance at 7% after implementation of this plan you would have a $300,000 balance at 7%. The borrower would have a payment that was smaller by $665, the bank would have another $100k to strengthen its capital ratios and a loan with an interest rate that is still marketable.

You might be wondering why not give everyone the same percentage of their mortgage, like 20%. You certainly could, but that would be as unfair.

The only, ahem, problem is the math. The cost is off by one decimal place. If I count zeros correctly, the cost would be $44 trillion. If it worked out to $4.4 trillion it would be in the ballpark of what will be spent. Oh well -- back to the drawing board.

Comments

[Gtarras:]

actually, the correct number of mortgage loans outstanding is about 54 million...

2008 Dec 23 05:44 PM

[markg:]

Once again we see that once the idea of publicly funded bailouts start, every business puts their hand out. Would all the columnists get over the bailout idea.

What happened to capitalism?

2008 Dec 24 01:46 AM

[John Polomny:]

Nusbaum I gave you a bunch of crap a couple years ago on an article you wrote advocating Icelandic Bonds. However I must say you are spot on with this article and I have noticed your writing has gotten a lot better rcently. Are you drinking bottled water instead of tap water?

2008 Dec 24 02:48 AM

[Rhett:]

Sounds like a good Soviet Five-Year plan.

2008 Dec 24 09:18 AM

[nobull:]

Agree. This whole housing bailout is the stupidest idea ever. Does nothing for the economy. They have done enough damage to the rest of the economy in their moronic efforts to fix housing and bailout losers.

2008 Dec 24 10:08 AM

[Austrian Sc...:]

We already have a system to handle these situations. It involves the foreclosure and bankruptcy process. We need to just let these work. They aren't doing anything for the people anyway because for every family that moves out of a foreclosed house, another moves in. The amount if idle time for that house depends on the amount of bureaucracy and other intervention the government puts in the way.

2008 Dec 24 10:52 AM

[Kunst:]

Devalue the dollar 50% and a whole bunch of these problems disappear. Yes, others appear in their place. It's inevitable.

2008 Dec 24 04:27 PM

[prudentinve...:]

Let markets run their course, let the law prevail, and stop trying to pick winners and losers, and trying to bail out Mr. X at the expense of Mrs. Y!

2008 Dec 31 04:08 PM