The Facts Behind the Coming Congressional Mortgage Bailout Bill 13 comments
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Senator Richard Shelby, Republican - Alabama, the ranking member for the Committee on Banking, Housing, and Urban Affairs has made several TV appearances lately discussing the progress being made on the mortgage bailout bill coming soon from Congress. No one yet knows what the full extent of the bailout bill will be, and they do not like calling it a bailout bill, but that is what it is no matter what it is. Here’s why:
When low income people go for an initial or refinancing mortgage loan they almost always include some aspect of bill consolidation into the loan in order for to qualify for it. I myself have had 5 conventional fixed rate loans and have included some bill consolidation into 3 of them to improve my cash flow as I upgraded to larger and larger homes. What this means is that other personal debts such as auto loans, credit card balances, and the like are included in the hundreds of billions of defaulting loans that we taxpayers will now subsidize.
I spoke with 10 people I know in the past week. All of them have included bill consolidation into at least one home mortgage or second mortgage loan, 100%. Three of them bought SUVs and used the mortgage to retire the loans, and one covered his four-wheeler loan. I know of one fellow who consolidated his credit card balances of over $30K. It seems he had to run up the cards to make ends meet because he was sticking his pay check up his nose and had several gambling markers outstanding.
It just makes sense to consolidate high interest bills into a lower interest home mortgage to improve one's cash flow so that one can over-buy, while also getting a mortgage interest tax write-off. Almost all people will do this at some time in their life, but lower income people are the most prone to do it. Many mortgage companies required it to get these now defunct mortgages in the first place. The problem here is that many of the recent and pending foreclosures probably would not have occurred without the added loan principal to cover bill consolidations.
So, when the mortgage bailout bill comes from Congress, just be aware of why your income is being redistributed to lower income, or in some cases higher income, people. You are not being asked to lend a helping hand to a pitiful group of unfortunates which through no fault of their own now find themselves on hard times because they were victims of unscrupulous lenders. You are being asked to refinance automobiles, big screens, four-wheelers, drug habits, gambling debts, country club bills, and the like.
I wrote an article a few months back on Seeking Alpha entitled “Saving the Economy with IRA Funds”. The article received very polarized reviews because touching IRA funds is a very sensitive issue, and I must admit that I left a few open switches as to how it would all work. The article was subsequently reviewed by Allan Meltser, Arthur Segel, and Ellen Zentner, and received positive comments ranging from “interesting” to “fool proof”.
I still believe that Congress should act first to enable the responsible homeowners, like myself, who wish to pay off their mortgage balances with their IRA funds with no additional tax or penalty for early withdrawal, to do so while holding their homes in their IRA accounts as collateral. This would amount to an interest free secured loan by the homeowner to himself. It would allow him to be his own banker and save hundreds of thousands in interest payments to the irresponsible mortgage brokers that got us into this mess.
This would also help to recapitalize some mortgage lenders, would result in more tax revenue without increasing taxes due to not having the mortgage interest write-off, and would be a huge economic stimulus package - targeted at the people who deserve it most, financially responsible Americans.
The only sensible way to cover the bad mortgage loans is to place them squarely on the mortgage companies (C, WM, WB, NCC, LEH, FNM, FRE, BBT, RF, STT, STI, etc.) that issued or bought them. I am an independent and have not agreed with President Bush on many things during the last painful eight years, but I agree with him on this issue. I hope he quickly vetoes any bill that smells of a bailout and pray that congress will not have the votes to override him.
Disclosure: Short WM.
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This article has 13 comments:
The concept of the GSE's is brilliant and led to a wonderful mortgage secondary market of quality loans. FHA, VA and normal FNMA/FHLMC loans are not the problem today. The low to moderate income legislation forced agencies to make bad loans to those people...hence, that is their small portfolio of bad loans. The only real problem is the GSE's were raped by the management.
I wonder if Franklin Raines and James Johnston made large contributions to the Clintons as "repayment"?? That would be a good research project.
i dont think interest rates would rise - maybe in the beginning, but then competion will work its way through the system and interests should decline.
The timing is matching exactly the slumps at financial stock market .
These home owners who lost their homes might be the same victims who have suffered grave loss , over the slumps .
Those who stored their savings in bank stocks which had been stable for about 5 years , would lost most severely .
They are simple , hard working people but victimized by the naked shorters .
The immense power of naked short selling drove the bank stock pricings lower than lowest .
SEC allowed such unlawful manipulation , one article indicated that some published records have shown that some short sold shares were not delivered for over 200 days .
SEC announced emergency measures to police naked shorting on last Wednesday and somehow two days later , nullify the effect of their own measures by exempting the market makers .
The requirement of delivering the shares short sold by the next day seems reasonable under the computerized system .
Naked shortings in the now distressed economy intensify the vicious cycle that spirals towards economic destruction .
The government has a duty to serve the general public .
The bailout or whatever one names it , is a measure to reverse the cycle towards a better economy .
Why not ? I know , you short sellers , don't agree .
Let's get realistic on the gov't's bailout plans. The big investors and lenders are balling and wailing (albeit in private) to the gov't to help alleviate their pain. If gov't can stop the decline in home values, that would utimately help their portfolios. If the gov't can increase the money supply (by extending certain credit facilities), that would help their liquidity problems. If the gov't can keep interest rates low, that would help them raise needed capital and forestall futher foreclosures and further home value declines. See who the gov't is helping? (We are in for a huge in wallup of inflation, eventually.) Oh yes, this is election year, so let's make it look like we're concerned about poor little folks who were innocent victims because that strikes a chord with the common voter, and we need those votes.
I can take a little pain. Let's have no bailouts. Let whomever will fail, fail, and we'll all pick up the peices and move on. Moving on should include blaming the abuses where they occurred and put a control in place to minimize re-occrrence of the abuse.
I won`t say anything about the government regulators except that `by their fruit you will know them`, but the Federal Reserve is owned by the banks, so get a clue. The banks have a virtual `call option` on a hefty chunk of our labor and wealth provided to them by the Federal Reserve. In other words, even if they lose money, their downside is limited, just like it was for the income-challenged people who took out low-up-front-cost loans for housing that they couldn`t otherwise afford, people who could live in a nice house for at least awhile and maybe even make a bunch of money on the deal `down the road`. It would be the fiduciary duty of anyone offered a deal like that to grab it and run, especially if they had children who had never had a chance `to live in a nice house in nice neighborhood`.
And who can blame the banks for taking us up on a similar deal? If the deal goes well, then they get `filthy rich`, if not, they get time to spend all the money OUR SYSTEM has tossed into their laps. Tough choice.
As we learned in `Quality Improvement Process 101`, the problem is never `the people`. The problem is always THE SYSTEM. Unless (and until) we fix THE SYSTEM, the same bad things will keep happening, over and over. The fault lies not with the borrowers and the banks wo profit from THE SYSTEM, but with our ancestors for letting this SYSTEM get set up, and with ourselves for letting a SYSTEM continue which incentivizes activities that lead to our own destruction.
First thing we need for our NEW SYSTEM is our own, debt-free U.S. Government currency, backed by all the real estate within the nation`s borders (of which property the U.S. government is the actual owner...`legal` owners are granted `legal exclusive right of use` by an `actual` owner, valid until such time as the actual owner changes its mind or becomes unable to defend its ownership claim). Since banks will no longer be able to print the our new currency to cover their losses, and since we will no longer be dependent upon banks to maintain a flow of credit, banks should become more conservative in their lending and speculation. We should also get rid of FDIC insurance to further encourage such a change.
While we are at it, we should replace all income-related taxes with a 1/2% electronic transfer (aka debit) tax which will be avoidable by the use of cash. This will not only rid us of the IRS (saving us the billions of dollars currently spent on `tax reporting`), it will also end the current system`s penalization of work and entrepreneurism, and release for investment purposes untold billions currently spent on `tax avoidance`. This debit tax will not only be more of a tax on wealth than labor and be (arguably) voluntarily-paid, it will also act to discourage excessive short-term market speculation and will raise enough revenue to begin paying off the National Debt, a debt which will no longer be growing once we have switched over to our own debt-free currency. We will also apply any Federal Reserve dollars that are swapped for our new currency toward paying off the National Debt.
Since the U.S. government has, by granting `exclusive rights of use`, denied everyone free access to all of its property, and since the U.S. government has not compensated everyone for that `taking`, we should elect a Congress that will pay every legal U.S. resident `Adequate and Equal Just Compensation for Denial of Free Access to U.S. Property`, compensation which WILL FUNCTIONALLY REPLACE ALL FORMS OF PERSONAL AND CORPORATE WELFARE, SUBSIDIES AND BOONDOGGLES, including the rescindance of Federal Minimum Wage laws and a phase-out of the Social Security system. (Once everyone is getting `Denial of Free Access` compensation their whole lives, it would seem arguable that the vast majority of people will be able to save enough to be able to comfortably cease working at some point in their lives.)
As a starting point, $1000 per month (of the new, non-Federal-Reserve, non-Debt-Money, as described above) should be paid to every legal adult resident (compensation of minors should, of course, be held `in trust` to avoid incentivizing baby factories). Since everyone gets the same amount, this compensation plan is not wealth redistributive, but will give the least wealthy the biggest advantage (in terms of monthly percentage increase of wealth) and a better chance to `catch up` than the current system that keeps the rich getting relatively richer through good times and bad.
Once this NEW SYSTEM gets going, we should expect people in other countries to insist that their governments either emulate our NEW SYSTEM, or else apply for U.S. statehood as The Republic of Texas did in 1845.
Benefits of the new system should include better childcare, less poverty, less crime, cheaper government and a safer world. All in favor, help spread the word.
for Reviving the Economy
by Stan Muse
The Federal Reserve is out of Federal Funds rate options and now the Congress is about to pass legislation which will be the largest bailout bill in the history of the world. Fannie Mae and Freddie Mac are now penny stocks with perhaps over 1000 bank failures yet to come. The American taxpayer will be told that they and their children will be writing big checks to rescue the Wall Street crooks and congressmen that caused all the problems, while receiving nothing in return.
Anyone who has been following recent congressional hearings knows by now that this is unacceptable to Main Street, the voters who will be firing their congressmen for turning the USA into a socialist country. It is also widely believed that this bailout bill may not be embraced by Wall Street because of its onerous terms even if passed. Finally, it will not provide sufficient liquidity for improving the rest of the economy.
A much more effective and fairer way to end our economic crisis is easily attainable. To state it simply, all Congress has to do is to pass a Mortgage Investment bill which allows individuals a one-time option to use some of the funds in their IRAs to pay off their mortgage balance in full, without any penalty, interest, or taxes for doing so. In return, individuals choosing to exercise this option give up their mortgage interest tax deduction for life. This bill could be passed quickly and independently of any other economy-related legislation currently being debated, or included in the current bill. Individuals choosing this option would need sufficient IRA funds to pay mortgage balance in full. The actual payment to the individual’s mortgage company would be done by the IRA managing institution to avoid fraud.
As one senator recently stated, ‘for most people their home is their IRA’. For many others, their 401-K plans hold many trillions of dollars, much of which by now is parked in money market funds or T-bills as mine is. If these IRA funds could be released to pay off mortgages, we could possibly avert, or at least significantly shorten, the economic recession we now find ourselves in. In fact, no other bailout legislation may even be necessary, although more regulatory legislation is certainly needed.
I asked Allan Meltzer, Arthur Segel, and Ellen Zentner to review this proposal and received some positive responses. Ellen said it seemed to be fool-proof and better than a reverse mortgage. In fact, it is a no-brainer for the homeowner with a large 401-K balance, and for the government. The only people who might object, as Ellen stated, are the bankers who want to keep homeowners dependant on them, especially those in the upper-income group. But even the bankers can not want the government to own a large stake in their business for a multitude of reasons.
It makes sense to allow people to use their IRA money, which they earned, to invest in the best and safest investment they could ever make, their home. Presumably they will need a place to live in retirement on a fixed income. It makes no sense for someone with more than enough IRA funds to cover their mortgage balance to loose their home because they lost their job and can not pay their mortgage. It also makes sense because it is not some form of government bailout which rewards the bad behavior of mortgage companies and unqualified borrowers. Instead, it rewards the good behavior of those who have saved and invested in the economy
If only 5 million people chose this option, for an average of only $200,000 each, the result would be $1 Trillion in paid-off mortgages, providing liquidity to the mortgage industry. By executing the option, an individual’s annual mortgage payment would become disposable income to put back into the economy or back into IRA accounts. To the individual, the effect is the same as lowering taxes. If only 5 Million people were able to put back $20,000 per year into the economy, the result would be a $100 Billion per year stimulus package for many years to come.
In my case, with $800K in IRAs and a secure pension, I would increase disposable income by $1600 per month while reducing the IRA balance by only $160K, but saving over $120K in future interest payments. I could retire, which I can not afford to now, and leave my six figure job to someone else. I could also quickly replenish the IRA money used to pay off my mortgage with the extra income.
Adding a further provision to delay receiving Social Security payments for a year in order to exercise the option would be a baby step towards privatization of Social Security. Anyone financially able to exercise the option should be able to delay the payments. For every 5 million people choosing the option, approximately $100 Billion would remain in the Social Security fund. This could fix our problems with Social Security for good.
Some of the benefits of this plan would be to:
• Immediately increase an individual’s or married couple’s disposable income by tens of thousands of dollars each year while enabling them to become debt free, helping families to stay together
• Save homeowners hundreds of thousands of dollars in mortgage interest payments
• Encourage individual IRA savings by many who have never saved
• Allow many people to retire earlier than they otherwise could
• Create demand for housing, reducing inventory, and stopping the decline in home prices
• Stimulate the overall economy, creating and saving jobs
• Not cost the government anything, and actually Increase federal, state, and local tax revenues by eliminating individual mortgage interest tax deductions, without raising tax rates
• Force the banks to sell their good loan assets to cover their bad loan losses, instead of forcing the taxpayer to buy their worst loans, and increase liquidity for new loans to those who need them
• Allow the free market economy to work through the crisis rather than resorting to socialism
• Not increase the national debt nor the money supply as a bailout would do and contribute to inflation
• Allow the individual home owner to the freedom to become their own banker with the money they earn, reducing America’s dependence on bankers, and changing America from renters and borrowers to homeowners and savers
The merits of this simple plan, the Mortgage Investment bill, for saving the economy, instead of trillions of dollars for a Wall Street bailout which will socialize the finance industry, are obvious and would benefit everyone involved. The individual gets more disposable income and a chance to live debt free, the capital markets get needed liquidity, the government collects more taxes and collects them sooner at the expense of the bankers, the housing market gets more demand, and the general economy gets a much needed boost for the next few years.
Democrats should like this plan because they can claim that it lets the wealthy pay for this mess. Republicans should like it because it increases disposable income, which has the same effect the same lowering taxes. The average voter should like it because it addresses all segments of the economy with a huge economic stimulus package, not just Wall Street, and costs nothing while helping to pay off the national debt and potentially fixing Social Security.