An Alternative to the Trillion Dollar Deficit 25 comments
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Am I the only one who thinks that a trillion dollar deficit, proposed by the President-elect, is financially insane?
True, as we head into the deepest recession since the Great Depression of the 1930's, we may succeed in becoming the Great Depression II. However, before we touch a lit match to a fuse on a trillion dollar budget deficit (not to mention funding for the wars in Iraq and Afghanistan occuring outside the annual budget, which will surely detonate our country in the future), let us try to address the original problem.
We all agree residential real estate began this current economic slide and that residential real estate's recovery is necessary to end this slump. So, let us rethink the solution.
Since a trillion dollars is on the table, why not try the following; The US government enacts a new program to refinance the following mortgages: 1) all sub-prime mortgages that have reset and will reset. 2) Any mortgage that is underwater by more than five percent; 3) mortgages of homes repossessed in the 4th quarter of 2008 and currently unoccupied, if the previous owners are interested in returning.
Once the government has identified these mortgages, borrowers may apply for a new, 30-year, fixed-rate mortgage, issued at one percent over the current 30 year T-bond.
Do not stop reading. Here is how we save residential real estate and America.
All refinanced mortgages are backed by the full faith and credit of the US government. All refinanced mortgages are assumable.
Yes, I said ASSUMABLE.
Catalog the benefits. Currently, a raging debate about mortgage cram-downs by banks is taking place. Both sides have valid points. By refinancing existing mortgages and paying off lenders immediately, investors holding MBSs are "made whole", per the terms of the mortgage, and contract law is preserved.
Is a home more valuable or less valuable with an assumable loan? The current inventory of vacant and unsold homes would quickly reduce while prices stabilized. Ask a real estate agent if a home with a 30-year, fixed rate mortgage, at 4.25%, completely assumable, is marketable.
Banks' capital requirements and their need to raise cash for 2009 is lessened. Banks will also have fewer assets on their books. Retirees living on fixed income investments are starving for yield. T-bills and CDs today only reduce investors' disposable income and subtract purchasing power from the economy.
On a $200,000 mortgage, refinancing a 6%, or 8%, 10% mortgage, down to 4.25% mortgage is like getting a stimulus check, for several hundred dollars, every 30 days. Would a small business owner rather receive a lower tax rate and fewer customers or 10 or 20 homeowners in his neighborhood with additional money in their pockets?
Vacant homes lower property values. Vandalism occurs to individual properties, squatters break in and stay illegally, and crime can increase in the neighborhood.
The government could begin taking applications 30 days after Congress approves such a bill and begin issuing checks within 90 days, for immediate repayment of mortgages to lenders and injecting more disposable income, through lower mortgage payments, throughout the economy. The psychological benefits to the country alone, with such a program, are incalculable.
Mortgages are public records. This program is completely transparent. As the money is spent, its final destination is available for all to see.
Lastly, if the government is going to destroy the dollar by issuing two trillion dollars in obligations this year, why not try this approach first.
It is just as insane as a trillion dollar deficit for years to come.
Disclosure: None.
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This article has 25 comments:
Will further stimulate the economy by putting all those mortgage brokers back to work!
Why not just have a refinancing for EVERYBODY, with those that are paying on time having the most stimulus (e.g., 0.5% over T-Bill spread, 1.0% for those that are deliquent.)?
I say we review all loans from 2004 to 2008 and find the people who put 10% or more of their own money down and then help them recoup their lost equity. This will reward responsible behavior, avoid moral hazard, and cull the necrosis of 'avoidable foreclosures'.
On Jan 09 01:10 PM TPoise wrote:
> So nothing for the 90+% of Americans who pay their mortgage on time?
>
>
> Why not just have a refinancing for EVERYBODY, with those that are
> paying on time having the most stimulus (e.g., 0.5% over T-Bill spread,
> 1.0% for those that are deliquent.)?
On Jan 09 02:43 PM cadoggy wrote:
> I agree with TPoise. I can't stand hearing all the plans helping
> people in trouble with their mortgages and ignoring the prudent buyers.
> Why are they in trouble??? Because they made bad choices or they're
> newly unemployed. Either way they need to change their lifestyle
> to fit their new reality.
>
> I say we review all loans from 2004 to 2008 and find the people who
> put 10% or more of their own money down and then help them recoup
> their lost equity. This will reward responsible behavior, avoid moral
> hazard, and cull the necrosis of 'avoidable foreclosures'.
1) the right people are rewarded for past behavior
2) the amount of waste via pork and inefficiencies is mitigated
On Jan 09 05:42 PM Can'tSpotABubble? wrote:
> For this "crisis" to come to a conclusion, ALL the bad debt must
> be forced into the open and defaulted. Until this happens the powers
> that be will continue to paper over the debt. The longer we wait
> for this eventuality, the harder the fall will be.
On Jan 09 06:46 PM cadoggy wrote:
> I'm ok with the trillion dollar deficit so long as
>
> 1) the right people are rewarded for past behavior
> 2) the amount of waste via pork and inefficiencies is mitigated<br/>
>
The residential real estate market was overbuilt due to speculators and poor underwriting. This was the trigger not the cause of the current recession.
So we have a lot of homes/condos/strip malls that were built based on phantom demand. We have even lower demand from 2 years ago due to loss of JOBS. No work no home.
So we are now working out way down the demand curve to find the true demand. Will we overshoot to where supply will be the constraint.
In the above solution, we are trying to build some more phantom demand by artificially lowering interest rates.
Sorry folks, as in the S&L crisis of the 1980s we are going to have to let real estate find its new equalibrium point. The sooner this happens the better the foundation for real estate going forward in the future.
Here in Houston it took the better part of 3 years, so we are about half way down the path of this correction.
It is time to look long term as short term is going to be a rcoky and bumpy road. For investors, that means looking for where the growth will be as we work our way out the fine mess we find ourselves in.
"Is a home more valuable or less valuable with an assumable loan? The current inventory of vacant and unsold homes would quickly reduce while prices stabilized. Ask a real estate agent if a home with a 30-year, fixed rate mortgage, at 4.25%, completely assumable, is marketable."
Even if loans currently on the books were to be declared assumable, it would work to clear the market in dramatic fashion. Those instances where toxic loans (option arms) are securing properties will still not be assumed unless the Assumptor is capable of refinancing out of the bad instrument after aquisition. Those properties burdend with these instruments and those that are under water will still wind up as REO inventory, but those with favorable instruments and at least break-even equities would be snapped up in a heartbeat by those among us with the financial capacity to advantage their position by a long term accumulation of owner occupied or rental properties. An addtional benefit would be, as some have called it, a way to release the "animal" (current property owner) from the trap, regardless of whether or not one wishes to blame the animal for being in the trap in the first place. Another benefit which you touched on is to increase the ability of an owner to sell with a benefit, i.e. to facilitate the sale by taking some of the equity in paper at interest over some period of time. This might truly appeal to those approaching retirement and finding that the centerpiece of their retirement plan has suddenly become an illiquid ongoing liability rather than their nestegg.The real beauty in your thought however, is that it takes the need for Lenders'/Bankers' "new money" out of the equation, at least partially. Particularly since it seems these now highly risk averse souls will now only be willing to lend to those with one blue eye, one brown eye, and 360 months payments in reserve after closing. I only opine that they just recently found Jesus after their love affair with leverage and those low risk CDS investments left them at the alter.
If it's $50k+ underwater?
We already have a Trillion dollar deficit. Obama just expects it to continue for a longer period of time. IMO
It is also insane to make any proposal for government to do financial bailouts of entity's or individuals. Additionally, government is always less efficient than private industry and it is scary to contemplate what that will mean when they start to hand out infrastructure contracts on a massive basis. Real, sustainable economic growth always comes from the private sector and primarily from small businesses, which government can help more by getting out of the way more than by giving out money.
We need to fire Barny Frank, Chris Dodd, Chuck Schumer and a host of other clowns running our country who have not only been asleep at the watch, but actually promoted the contagion (if unwittingly, that's grounds enough to fire them, if otherwise, send them to jail where they can play poker with Madoff). Government needs to protect property rights and not redefine them through bailouts with our money. The time for a citizen's revolt draws ever closer. If they so much as give a dollar to bailout investors into Madoff's scheme, I'm the first on a plane to DC to start the revolution (no, I'm not going to fly the plane into anything).
Respectfully, all the revised bailout ideas I see posted to Seeking Alpha are more of the same insanity to try to sustain a course that is not sustainable. Is anyone in government willing to tell the citizenry we need to tight the belt, stop overspending "at all cost" and pull together to make it through what promises to be a very rocky ride?
Let those banks that are insolvent fail. New banks will start up and take their place. The government should abolish the Federal Reserve and lend "our" Treasury dollars directly to the remaining regional/local banks and credit unions that did not participate in the excessive derivative speculation that has ruined our economy.
The government has a printing press and doesn't need to issue debt (t-bills, notes, bonds). The American citizen pays debt interest to the money lenders via the income tax which has been going on since 1913. Monetizing debt just exacerbates the problem of monetary and price inflation.
End the Federal Reserve private cabal!
NO. IT IS FINANCIALLY INSANE. They will bankrupt us with a plan that will harm not help the economy. It is beyond stupid, it is near-criminal in what it will do to the country.
The recession we are in is not a deep nor serious one, but is becoming one due to govt actions. Govt needs to stop its bull-in-a-china-shop behavior for the good of the economy.
I have a better idea than a trillion dollar deficit:
1. Repeal Sarbanes-Oxley
2. Spend NO EXTRA MONEY. The $700 billion was wasteful and extravagant enough.
3. Make the Bush tax cuts permanent. This will cost less than $50 billion/yr. very cheap compared to the alternatives. Add in a reduction in tax rates payroll.
4. get back to strong money, and a way to ease into that would be to start issuing gold-bonds, bonds that are backed by gold yet deliver interest. 1.5% interest would probably be enough, since they would be inflation protected.
The result of this will be more jobs, more economic growth and a better financial situation than we would get with the Obama boondoggle.
but the Obama voters didnt fire them, they gave them more power to enact a full-blown liberal Democrat agenda.
It's tragic but true, a near-majority of voters in the last election did not even know that the Democrats were ALREADY in charge of Congress. They voted for 'change' but have voted for more of the same mis-governance since 2006 that has put us in this economic pickle.
Your suggestions are intelligent, but have you considered the fact that
our economy and not merely the real estate sector are always vulnerable
to government interference via interest rate manipulation? Until the cen-
tral banking system is done away with, we will always have 'bubbles' that
inflate false wealth and intoxicate the American public then leave it with
a hangover the hard working citizens of this country have to pay for in
the form of so called 'stimulus packages' that produce no jobs, create
no wealth, and encourage no savings, which are (as any student of eco-nomics should know) the backbone of a truly stable and prosperous economy.
EDT
Chicago, Illinois
On Jan 10 12:04 PM pitchingpennies wrote:
> Marvin wrote:
> "Is a home more valuable or less valuable with an assumable loan?
> The current inventory of vacant and unsold homes would quickly reduce
> while prices stabilized. Ask a real estate agent if a home with a
> 30-year, fixed rate mortgage, at 4.25%, completely assumable, is
> marketable."
>
> Even if loans currently on the books were to be declared assumable,
> it would work to clear the market in dramatic fashion. Those instances
> where toxic loans (option arms) are securing properties will still
> not be assumed unless the Assumptor is capable of refinancing out
> of the bad instrument after aquisition. Those properties burdend
> with these instruments and those that are under water will still
> wind up as REO inventory, but those with favorable instruments and
> at least break-even equities would be snapped up in a heartbeat by
> those among us with the financial capacity to advantage their position
> by a long term accumulation of owner occupied or rental properties.
> An addtional benefit would be, as some have called it, a way to release
> the "animal" (current property owner) from the trap, regardless of
> whether or not one wishes to blame the animal for being in the trap
> in the first place. Another benefit which you touched on is to increase
> the ability of an owner to sell with a benefit, i.e. to facilitate
> the sale by taking some of the equity in paper at interest over some
> period of time. This might truly appeal to those approaching retirement
> and finding that the centerpiece of their retirement plan has suddenly
> become an illiquid ongoing liability rather than their nestegg.The
> real beauty in your thought however, is that it takes the need for
> Lenders'/Bankers' "new money" out of the equation, at least partially.
> Particularly since it seems these now highly risk averse souls will
> now only be willing to lend to those with one blue eye, one brown
> eye, and 360 months payments in reserve after closing. I only opine
> that they just recently found Jesus after their love affair with
> leverage and those low risk CDS investments left them at the alter.
On Jan 11 01:43 AM EDT wrote:
> Sir:
>
> Your suggestions are intelligent, but have you considered the fact
> that
> our economy and not merely the real estate sector are always vulnerable
>
> to government interference via interest rate manipulation? Until
> the cen-
> tral banking system is done away with, we will always have 'bubbles'
> that
> inflate false wealth and intoxicate the American public then leave
> it with
> a hangover the hard working citizens of this country have to pay
> for in
> the form of so called 'stimulus packages' that produce no jobs, create
>
> no wealth, and encourage no savings, which are (as any student of
> eco-nomics should know) the backbone of a truly stable and prosperous
> economy.
>
> EDT
> Chicago, Illinois
On Jan 10 06:55 PM Freedoms Truth wrote:
> "We need to fire Barny Frank, Chris Dodd, Chuck Schumer and a host
> of other clowns running our country who have not only been asleep
> at the watch"
>
> but the Obama voters didnt fire them, they gave them more power to
> enact a full-blown liberal Democrat agenda.
>
> It's tragic but true, a near-majority of voters in the last election
> did not even know that the Democrats were ALREADY in charge of Congress.
> They voted for 'change' but have voted for more of the same mis-governance
> since 2006 that has put us in this economic pickle.
>
video.google.com/video... part 1
video.google.com/video... part 2
www.themoneymasters.co.../ The Monetary Reform Act-a solution?
Check these out, they are excellent, I believe major financial system reform is a must!