Just Pay Off Everyone's Mortgage

With this headline that just flashed across my screen --$3 trillion! — Senate, Fed, Treasury attack crisis-- it's become clear that, if the U.S. government really wants to solve the current economic crisis, they ought to just do what John S. suggested a while ago in the comments section of my previous post .

Wouldn't it be cheaper to just simply pay off every mortgage in America? Then all those mortgage backed funky financial instruments would become sound. And relieving everyone of their mortgage payments means we can restart the the consumption bubble.

Not a bad idea - removing the uncertainty about souring Alt-A loans and the next wave of foreclosures would stop home prices from falling immediately.

In fact, since many of the problems with derivatives these days involve insuring mortgage debt that is either going bad or about to go bad, paying off everyone's mortgage would make a big chunk of the derivative mess just disappear.

AIG could be back in business insuring all the stuff they used to insure before they took a header into the mortgage backed securities business.

With today's potential $3 trillion addition to the previous $8 trillion in purchases, guarantees, and sundry bailouts (give or take a trillion or two), you could pay off every mortgage in the U.S. and we could start all over again!

Of course, this would probably favor the rich since they have bigger mortgages.

And renters would have to be compensated in some way.

Commercial real estate would still be in trouble until spending starts up again.

It would set a horrible precedent, but, who cares - fighting fires, water damage, etc.

It would hurt the bankers, since no one would be servicing mortgage debt for a while.

Other than that (and probably about a hundred more), it sounds like a plan!

Comments

[Johnny Sher...:]

People living in $400,000 homes are still wealthy by any objective standard.

People that own homes are still wealthy by any objective standard.

All efforts to bail out current homeowners will always favor the privileged over the lower-class.

On Feb 11 02:37 PM StockMarketSage.com wrote:

> Interesting, maybe they cap it to a certain amount like $400k to
> make sure the wealthy don't get too much love.

Feb 11 02:42 PM

[Jolly_Rancher:]

Government would collect A LOT more taxes because there would be no mortgage interest deduction. JUST FIX IT, NOW!

Feb 11 02:42 PM

[Michale S:]

A better idea is to Refi everyone to 3% for 5 years and have the balance of their mortgage be set @ between 5 and 5 1/2% for the duration. This would only cost a $trillion and serve as a much needed injected to borrowers who are still making their payments.


On Feb 11 02:34 PM James Cullen wrote:

> Oh yeah, and the amount of household mortgage debt outstanding according
> to the Fed... $10.5 trillion!

Feb 11 02:43 PM

[Michale S:]

It does not appear that a solution is extremely difficult once you get past the notion that a solution requires that pockets need to be lined either in Washington or Wall Street. I propose a mass refinancing up to $10-12 Trillion @ a rate of between 5-6%. I believe the government can subsidize for 5 years @ rate of 3%. This will cost about One Trillion Dollars spread over five years. It will be fairly easy to implement as banks who currently hold the notes can do an inexpensive refinancing and bill the government monthly for the subsidy. It will ease the monthly burden for Prime Borrowers, place dollars back in the pockets of the Middle Class as President Obama and Co. claim to so desperately want to facilitate. This will also serve as an effective stimulus to the economy and stabilize the unemployment rate, place a floor on the amount of go forward foreclosures and bankruptcies and gives the banks an opportunity to recapitalize. The housing market will find the bottom it is so desperately seeking and improve both consumer and business confidence. While there are clearly other issues around transparency, accountability and regulatory initiatives that need to happen in conjunction with this, such as how to assist the current pool of individuals who are either in foreclosure or about to enter into that state, this action serves as the beginning and would go a long way to restoring America's faith in the system whose reputation has been damaged possibly beyond a point of repair.

Feb 11 02:47 PM

[knoledgeable1:]

I think Cramer mentioned this a few months ago, but it is spot on.

Biggest problem with this idea is that there is no PORK!

But my solution is to name my house after Nancy Pelosi if she goes along!! (But please don't require me to talk to her.)

Feb 11 02:52 PM

[knoledgeable1:]

And on the point of $10 trillion outstanding mortgage debt vs. $3 Trillion spending I will quote Obama . . . don't let the perfect be the enemy of the good.

Just up the house value, i.e. any balance up to $250,000 get paid off in full. Now THAT's a middle class tax cut!!

Feb 11 02:55 PM

[JohnAl:]

(...rolling my eyes...)

All those in favor have big mortgages. The rest of us are opposed.

Next dumb idea?

Feb 11 03:03 PM

[Ivan the Cr...:]

I have another suggestion: No need to get the government involved. I suggest that everyone who doesn't have a mortgage send a blank check to someone who does have a mortgage. I'm sure when it's clear that this is the solution to all our economic problems, people will be more than willing to comply!

Feb 11 03:08 PM

[Michale S:]

While there are many who are going to feel slighted, particularly those who do not presently have mortgages, the repercussions and impacts effect everyone. To not implement or support a solution is acting in ones self interests and that would be detrimental as the problem is damaging many of those who were responsible. Inaction would do more harm than good to many more people, like it or not.

Feb 11 03:15 PM

[urgentcare doc:]

How about a one shot deal for everyone to refinance at 3%? No qualifying, just swap the paper. Housing prices would then drop to a reasonable level once the deal ends and the new mortgage payments go up. Those with the 3% deal would be underwater and unable to move but they would have cheap housing they could afford.

Feb 11 03:28 PM

[Bad Banker:]

What a great idea...since the forgivness of debt is considered income the Government can collect "income tax"...solve deficit problem.

Now with a house and all the equity (less taxes paid) I can now buy three more houses with 20%, unless they let me put less down; than I buy as many as possible.

Hopefully the program is still going on...I'll default, ask for my new loans to be forgiven and maybe do it over again until they stop the program. If I can buy enough homes through this process and rent them out to the little people...I should be able to retire.

Now that President "O" is also going to give me free health care...buy up any mistake I make...life is good.

If I would have known life was going to "change" this way I would have never supported Ron Paul.

One last tip...alway put your age down 20 year younger than you are...under the "health" plan in congress, when you get too old, they are going to deny you care.

21 forever!

Feb 11 03:32 PM

[mr freddo:]

I thank the author for an interesting article.

It seems that the approach of government is to spend a relatively small amount on a million different items when, as the author lightheartedly points out, it could be more effective to hit just one part of the crisis with a financial nuke. Let's just nuke that mortgage problem by wiping it out. The real estate market would snap back, consumer spending would jump, the stock market would go up and away, and those derivatives would all be rendered moot.

Honestly, although it would never get passed, it makes a lot of sense...
except that I don't have a mortgage!

Feb 11 03:54 PM

[Al-USA:]

"
It would hurt the bankers, since no one would be servicing mortgage debt for a while.
"

It's a great solution. Unfortunately, the capitalist elites, who seem to have the country by the ___, want to collect as much as possible on their speculative derivatives. Even if they bankrupt the country, it seems.

So, all this bailout nonsense is to the direct benefit of the financial elites. And if we don't do it, if the rest of the USA do not bend to their will and SUBMIT, they threaten to take down the financial markets by their choke hold on the credit markets. I don't know about you, but this seems like financial terrorism...

Feb 11 04:13 PM

[tmac1945:]

Follow that up with a firing freeze. Since it seems to be o.k. to pretend that the large banks are solvent, we should expand on that and pretend that no company is bankrupt. Requiring all companies to keep their employees would instantly restore consumer confidence, and the economy would start cooking once more.

Feb 11 04:53 PM

[APM:]

Hit the "Easy" button, and reboot the Matrix.

Feb 11 06:00 PM

[Roman_Fiddler:]

Love it - just give me a few days notice before it commences so I can buy a house ;o)

Feb 11 06:41 PM

[Roger Knights:]

Here's my much less expensive housing-mitigation measure. (My apologies to those who've read it here before. I'm hoping it will click with someone from Team Obama.)
=======

Why can't the gov't. take over where Rex & Co. left off, by offering homeowners a premium (say 15% of the house's current valuation) in exchange for a share of future profits (say 50% beyond its current market value) on the sale of the house? This would buffer the effects of the current crunch on the homeowner, allowing him to make his mortgage payments and/or renegotiate his mortgage, while being a good long-term buy for the gov't. It’s win/win.

Here's another suggestion. Since the gov't. is throwing money at make-work projects and infrastructure improvements, it seems to me that there's a project that could get under way much faster, with less likelihood of fraud or ineffectiveness than the ones I've been reading about. Namely, the gov't should offer to pay for home-improvement projects for home-owners in exchange for a share of future profits on the sale of the house. This would stimulate lots of economic activity, would upgrade the country's housing stock, would make life pleasanter for home-owners and their neighbors (who'd live in an upgraded neighborhood), and would be a good investment for the gov't. in the long run. It would also be politically popular (assuming it would work). (There are certain desirable home improvements that wouldn’t require skilled labor, such as adding fencing, and improving home security, insulation, and earthquake protection. Millions could be hired to do these tasks nearly immediately.)

Feb 12 12:56 AM

[Seth Wu:]

After Mortgage Reboot, Fundamental Weaknesses in Mortgage Market Need To Be Addressed, To Avoid Repeated Failures

After a reboot of the mortgage industry, going forward, there remains ongoing exposure because of the now standard operating model of securitizing mortgages and selling them off to inviting investors who are too remote to kick the tires.

While securitizing mortgages has freed up funds for mortgages and housing sales, arguably it has been far overdone to the detriment of home valuation (even beyond the issue of due diligence by the mortgage industry).

The anciently old and now "quaint" traditional methods of banks and mortgage companies owning the mortgage rights had the benefit of spurring home lenders to be extra prudent as to borrower's capabilities, and extra vigilant against misrepresentations and fraud in the process.

Mortgages bundled into securitized bundles for market investors should not only be rated in traditional methods, but they should also be tranched into aged bundles.

For example, mortgages that the originating bank or mortgage company lender has held for 6 years before being securitized should be bundled together and thereby might merit a valuation income stream based much closer to face value. This example of six years is due to the common practice of setting 5 year term for interest rate only / variable mortgage and so safety period actually should be based on the underlying facts ... of when the fully amortizing mortgage payments have a track record of having being paid.

In contrast, securitized mortgage bundles that have been held by the originating lender for less than one year, probably should be discounted by say 12 percent due to lack of track record of the payment stream and greater inherent risk due to a lower risk having been taken by the originating lender as stakeholder.

Bundled tranches between one year and six years of being owned by the originating lender would have corresponding sliding scale of discounted valuation.

Something like this would provide some incentive for originators to do a better level of due diligence such that the economic benefits of holding on to the mortgage as an investment would be economically rewarding, and a disincentive to merely being a boiler plate mortgage factory without taking any stakeholder's investment in the mortgage.

While conceptually helpful, the above may be too complex to consider and implement at this time.

Another alternative to consider is to require all originating mortgage banks / lenders to retain a substantial, materially meaningful equity interest the the mortgage benefits and duties. For example, the originating lender will have to retain the underlying legal contract, and can only bundle by subjecting a percentage of the mortgage income stream to assignment to a securitized bundle. So, maybe only 50% of the mortgage income stream can be assigned as is to an investment bundle with investors rights subsidiary, ancillary and incidental to the originating lender-owner of the mortgage. This should increase the caliber of mortgage approval process, and facilitate the borrower's ability to work out any subsequent needed recapitalizations or renegotiations.

Feb 12 11:35 AM

[Michale S:]

There it is. Mortgage modification. This will turn the market. Like it or not, fair or unfair, it is the beginning of the turnaround and stabilizes the market.

www.bloomberg.com/apps...

Feb 12 04:03 PM

[User 364730:]

Not satirical. Although paying off total may be overboard. Just pay 50% of all mortgages for primary residences only and the stimulus to the economy would be huge! Banks would still have all the mortgages to service with a boom in new potential. I would agree it is something I wish were not necessary but it seems like a better plan than just paying off business bad debts.


On Feb 11 02:37 PM Johnny Sheridan wrote:

> The exclamation mark at the end gives me hope that this is a satirical
> piece!

Feb 26 09:28 AM