David Lentz

Options Trader: Tough-Decisions Tuesday

From what I have seen, we are only about halfway through the number of existing ARMs out there. We can expect the beatings to continue until morale improves, or until somebody changes the machine that is delivering the beatings.

Options Trader: Tough-Decisions Tuesday

Let me try once more to be clear about this -- Homer Simpson is sitting at home, knocking back a brew or six, with the thought of what is he going to do when his ARM resets? He knows he can't handle the payment, and he knows his home now has a lower market value than the balance on his loan, so he cannot refinance?

What has occurred to daye, is that the Homers of America have sat on the train tracks, watching the train approach (admittedly, some have just walked away from their mortgages before going broke), closer and closer, until they are busted, without a home or assets, and their house goes to further depress the housing industry as yet more excess inventory.

Under my scheme, Homer gets a letter from his mortgage company that tells him his mortgage has been replaced -- by virtue of the new law -- with one that locks in his current interest rate (that he is able to make the payments on) for 130 years (for example). Now Homer has no choice in the matter (unless he can find a buyer, and if he could do that, he wouldn't be in the mess he is in), but he gets to keep his home, and is not driven into bankruptcy or made homeless. He still has whatever disposable income he had before to support the rest of the economy. OTOH, he is chained to that house for the rest of his life, or until home values appreciate enough to enable him to sell it.

Cost to the taxpayer? Virtually nil. The punishment is shared by homeowners and lenders alike, as the lenders do not get the revenue stream at the rate they originally planned on. The chain reaction of imploding ARM resets, mortgage failures, lender and borrow failures would be ended.

It's easy. No hand-outs or bail-outs required.

Options Trader: Tough-Decisions Tuesday

Phil and Cover -- you misunderstand me -- I do not think that ANYONE would willingly sign up for a hundred-year mortgage. But rather that the still-outstanding ARMs (which are going to continue to implode like clockwork as their rates ratchet up), be forcibly converted to fixed-rate loans, with the rates at reasonable levels so that they can maintain the payments, but that they would suffer for their foolishness, and their lenders not bear all the punishment, by having the terms of those mortgages extended until the total interest collected would be the same as it would have been under their current ARMs.

I repeat, this would only apply to existing ARMs. New mortgage seekers would be free to choose any kind of mortgage they could obtain (except ARMs, which should be barred from use by homeowners). The intent here is to stop the implosion of the existing ARMs, and stop the build-up of the housing overhang. That's all.

And this would do so, far more cheaply than any other scheme. And at this point, it appears that cheap is a major consideration, Uncle Sam having blown the family nest-egg at the local saloon.

Options Trader: Tough-Decisions Tuesday

There is an even cheaper way to stop the madness.

Simply require that all holders of ARMs convert them to fixed-rate mortgages, at the going rates that the GSEs offer.

To prevent the lenders from getting a haircut, and taking all the pain, merely extend the terms of the new mortgages such that the lenders will ultimately receive all the interest that they would have if the ARMs had continued, or some reasonable fraction of that money.

The net impact of this is that the borrowers that are in over their heads get effectively converted to renters, with mortgages of over a hundred years on houses whose value is below the amount on the mortgage.

So they can't sell the homes until housing market valuations recover, but they are also not forced out of their homes, dumping the repo'd properties onto a scrap heap that is crushing the industry.

In the end, these folks are probably toast anyhow, but at least it does not happen in just a year or three, but instead is spread out over decades, with unlucky individuals facing up to their problems as they are either forced to move or suffer economic calamities (lose their jobs, divorce, etc) that place them in the position of having to deal with their under-water mortgage.

This would immediately stop the inventory build-up in unsold housing, would allow millions of homeowners to remain in their homes (albeit saddled with a debt burden they will, in all likelihood, spend the rest of their lives paying off), and allow things to stabilize in the ravaged housing industry.

Then we can have a measure of sanity (not too much, as that wouldn't be normal) in the financial industry, and begin to lay the groundwork for a recovery. The powers that be would have the time necessary to implement a sane regulatory framework -- instead of some emergency claptrap that will be riddled with a whole new set of problems, which is where we are heading now.

It's really easy to bring all this to a responsible conclusion. Instead our collective head is on fire, and we are attempting to put it out with a hammer.