The Solution

Discussion in 'Economics' started by Mvic, Sep 15, 2008.

  1. Mvic


    I posted this early this year but now that the GSEs are under treasury control it is easy to implement.

    Basically means tetsing for people who can't pay thier mortgages.
    Sliding scale starting at extending term ending at interest only.

    In other words based on people's income available to pay mortgage (ie ex other debts expenses) they qualify for a longer term (smaller payment) or worst case IO (with caveat that when prices recover house to be sold or principle starts to be paid. Stop the vast majority of foreclosures and buys the economy time for demand for home to build and prices to recover. Stops the ball that is dragging the economy and financial markets down.

    The GSEs buy the toxic paper from WS at a discount and implement this program. There may be some more writedowns but not as bad as they would be if something like this to stop the downward spiral isn't implemented.
  2. pitz


    But the problem with most of the mortgages that are out there is not one of payments, but is rather one where the interest rate on the loan exceeds the amount of steady state cashflow the borrower *truly* has available for housing.

    How did this happen? Well, people obtained loans either upon completely fraudulent representations, and/or people obtained loans on earnings that were not likely to repeat themselves year in and year out, as would be required for a mortgage.

    Nobody who wasn't in the business of speculation, who obtained a normal 15-year or 30-year fixed loan without fraud, qualified based on long-term income averages for their occupation is having any problems making their payments.

    However, there's gazillions of instances where people, especially in the construction industry, went to the banks, got loans based on their 'bubble' earnings, and the banks happily granted them funds based on the assumption their income would remain high forever.

    I don't think so, because the people who are defaulting are the people who couldn't afford anyways. Either they messed up by borrowing too much, or their lender messed up by lending too much. Either way, the loans are doomed to fail. All the trickery in the world regarding 'payments' or (positive) amortization won't mean squat.

    The good quality loans aren't blowing up yet, and won't likely.

    I'm a professional. I'm tired of seeing construction labourers getting the same mortgage rates as I do, because of the implicit subsidies of Fannie Mae, even though those construction workers often make more money than I do. Their jobs are cyclical, and the lenders really failed to appropriately penalize cyclical income.
  3. Daal


    I agree. the government will have to pick up the check(whether they should or not I think its irrelevant). paulson and bernanke are behaving like a government officials, waiting till things get awful to do something. but a combination of what you said and the fed monetazing agency debt could be coming down the line
  4. Humpy


    If Bush had any financial expertise ( he has no expertise in any field sadly ) he would have got rid of Greenspan years ago and found someone to put controls on the "GREED " and stupidity of mortgage lenders and banks.
    But he didn't.
    He should have been sacked for incompetence years ago imho
  5. Stop the gold manipulation and I shall rescue Wall Street.
  6. Mvic


    While I understand your frustration it does come off as a bit elitist.

    I think you overstate the extent to which ordinary people who don't fall in to your categories are finding it hard to make ends meet. It was not just fraudsters and speculators who got in over their head, after all we are talking about a projected 2M foreclosures min.

    I think that IO or a sliding scale where the length of the term is increased would stave off a lot of the current and coming foreclosures, the fraudsters and the specs have already been purged at this point.

    This solution would put a floor under the losses which is what we need to stop the downward spiral. Then time will take its course on prices and help cure this mess. The alternative is not particularly palatable even to a guy like me who is mostly cash and just waiting for the bargains. I don't want to see the country face a depression, nor the world for that matter, and all the misery that that entails just so I can get a great deal on a mansion.
  7. :eek:



  8. "Financial expertise" only matters if you care about the outcome. If all you want to do is exercise power and spend willy-nilly, no consideration for anything nor anyone is required.
  9. Humpy


    Both candidates are talking CHANGE
    Well that's a start I guess.
    The old model has served its time and is imhumbleo well overdue for up-grading. Political and economic and attitude.
    My guess is that either candidate will struggle to change things, they are so entrenched. If they have any sense at all then I would suggest the next President should hire the right people that DO have the necessary and not try and do it all themselves.
    The chances are the usual "brown-nosers" will weedle their way in and nothing will improve.