oleeb's picture

    The fastest stimulus and the best long term stimulus: pass em now!

    While the media and our elected officials obsess about how to make sure the rich stay rich, the ordinary American family is being heaped with the debts they are generating to do this.  Problem is, throwing money at the perptrators of the economic catastrophe is doing no good at all.  What to do?  What to do?

    I propose two things.  One that Obama has voiced support for and another he hasn't breathed a word about.

    First, the one Obama hasn't said anything about: the fastest and most supercharged stimulus that Congress and the new President could enact would be to offer refinancing of every existing mortgage at either 3% or 4% at a fixed 30 year rate.  Every homeowner in America would be eligible for the refi on their primary residence so it is inherently fair and equitable.  Few (if any) people have rates that low so nearly every homeowner would benefit right away and not just a little bit. 

    The US Government would make these mortgages directly, bypassing the banks and finance industry who are now hoist on their own petard of greed and irresponsibility, thus eliminating all the superfluous fees they charge.  With current interest rates, the government would actually realize a profit on the mortgages in the long term even though they would offer mortgages at historically low rates.  Furthermore, since this would lower every mortgage payment in the country for every family, literally hundreds of billions would be instantly freed for other purposes without balooning the deficit even further or rewarding the crooks who wrecked the financial industry and caused this economic catastrophe.  All the bad mortgages out there would be paid so we eliminate the whole "distress" asset problem with respect to mortgages.  This is a damn sight better, in terms of addressing the real problem at the heart of the credit crunch than it is to simply dole out money that will never be repaid to banks who will not lend it out.  Nearly every family in America directly benefits and the nation as a whole benefits tremendously.

    Second, the solution Obama has said he supports and that Democrats have always been for anyway: a massive, sustained infrastructure rebuilding program nationwide.  Bridges and roads that need repair could be rebuilt but a higher priority should be put on building a national rail system for passengers, mass transit light rail systems in every city of over 100,000 people, and rebuilding and expanding where need be the frieight rail system.  We can build schools and public facilities and require that they all have a minimum percentage of the energy required to operate them come from renewable resources---specifically solar, wind, and water.

    It is far better to spend public funds on the public and the public good than it is to try and prop up failed businesses run by greedy crooks, scheisters, con-men and thieves.  It is also far better to use the people's money to make the lives of the people better than it is to take their money to make the lives of a few better.  There is no reason for the new Democratic President not to support such measures, particularly in solving the mortgage crisis which is at the heart of the panic and meltdown in our economic system.  It's time to start addressing the needs of the nation first instead of the needs of the richest and most powerful interests.  Besides, if it doesn't work, the people will at least gotten something for their money.  Under the current schemes passed and proposed, the people get screwed coming and going.  It's time people raised their voices loudly in demanding these sorts of solutions and let the financiers and other thieves from Wall Street regain their position the old fashioned way: earn it.  It is bound to improve the moral character of the rich if we take this approach as they will, for the first time, have had to work for the money they get instead of looking to Uncle Sugar for a handout.


    Worth discussing more, and I'm finding myself agreeing with the proposal.

    I like it.

    Every homeowner in America would be eligible for the refi on their primary residence so it is inherently fair and equitable. oleeb

    30% of homeowners have no mortgage debt -- that is, they own their home free and clear.

    Ellen, please help me out. You seem to have a better understanding of these financial issues than I.

    Let's pretend I have a $300k mortgage on a home that is now actually worth $200k (post-collapse of the housing bubble.)

    Gov't now chooses to lower my interest payment on this debt and stretch it another 30 years, under an assumption that it will prevent me from walking away from the home.

    The home was initially bought as an investment inasmuch as it was intended to increase in value and support my retirement. Now, it appears that even with the lower mortgage payments I will still owe more than its value at the time I eventually choose to cash out in retirement.

    Insolvent now, or insolvent later seems to be the choice. (Or, at least, take your loss now, or take it later.) Where is the advantage to the consumer for him to simply rework the mortgage while still paying considerably more for this asset than what it is worth?

    In the end, it seems that this proposal does not in fact have anything to do with helping out homeowners, specifically. If a person retains their job and all else remains the same, they should be able to afford the house payments they presently have. (In fact, probable devaluation of the $ may work in his favor, no?)

    This proposal seems to be instead a torturous means by which to get $$ into circulation, nothing more. Would we not be better served to simply give every taxpayer x number of $$ to spend as they deem fit? Or perhaps find a more effective way to ensure these $$ get into circulation and stave off deflation and continuing recession?

    I hope you can follow the line of questioning here, and I look forward to your response - even if it is to assure me that in terms of my abilities as an economist, I make a pretty good truck driver.

    I hope Ellen answers you, but I would just like to point out one variable.

    I and the spouse will probably both be dead before our 30-year mortgage is paid off. No matter the value of the house, we aren't going anywhere as long as our house payment continues to be less than rent would be for a smaller place. Monthly, we're paying $50 less than we paid to rent the place in 2000. And then there are the tax write offs. Yeah, there's upkeep costs....so what... better than having a landlord that might kick you out all of sudden when your lease is up and your 65 and you have to come up with security deposit, first and last month, moving costs....if rents dropped like 75%, we might walk, otherwise, it wouldn't be worth it.

    I'm confused - if the government takes over these houses/mortgages, will the government then pay the banks some amount of $ for the mortgages that they banks have?? What price would the government buy these homes from the banks for??

    It seems like this idea will saddle the banks with even more losses than they have right now.

    Good points. But I believe they are assumed in my questions.

    If you are a wage-earner living paycheck to paycheck, I see nothing that has happened with this recession that affects your abiility to maintain your mortgage payment as always.

    Rescheduling the mortgage at a reduced interest rate may indeed lower the payment. But if the aforementioned wage earner loses his job, he can afford NEITHER the new or old mortgage.

    So what dynamic here is it that this program is supposed to affect? Am I missing something, or is this just a tax dollar giveaway made more difficult (and more exclusively to mortgageholders only, as per Ellen's point) than necessary?

    Values too, can be adjusted so they reflect reality instead of the artificially high prices of the bubble. The government can do this and did do this previously during the New Deal so it isn't as though it is an untested idea. If there is a difference between the refi and the articially inflated bubble price there are remedies for that too.

    You are correct this pumps huge amounts of money into the economy and that's a good thing. It is also a very economical way of addressing the problems in the mortgage industry as opposed to borrowing billions to buy bad mortgages that will never return a penny. It relieves a great deal of economic pressure on millions of families. It also gives a break to the very people who will have to be paying back all the free money the government is giving out to the rich and powerful.

    Seems only fair to me that if we're deficit financing the various business bailouts to the tune of nearly a trillion dollars, we can afford to loan ourselves the money to achieve this goal which will stop the bleeding that continues in the mortgage industry (10,000 forclosures per day and nothing on the horizon can be ssen that would slow that number) and stabilize the economy. All those bad mortgages and foreclosures is what keeps the financial institutions spooked and hanging on to the all the cash Uncle Sam is giving them.

    The benefits of this approach are clear, extremely widespread and beneficial in every respect. As a practical matter there is no reason not to adopt this approach or something very like it and quickly before everything gets much, much worse as it will with continued inaction to help our citizens.

    It isn't "taking over" mortgages that is being proposed. It is refinancing them just as was done during the New Deal. Various forms of this idea (albeit in far too restricted forms) are being floated by numerous actors in government including the head of the FDIC. And in doing this, the government MAKES money! It isn't a loss. It stops losses from mounting.

    You're glomming on to a minor technicality here Ellen, but if you want to play that game (as you seem want to do) then I should have written "every homeowner who has a mortgage."

    Half a million people lost their jobs LAST MONTH for starters so many families that have always made their payments in the past are going to find it increasingly difficult to do. Many of them are not going to be able to find full time work. Millions of people also have mortgages that will be adjusting in the coming year but with much less equity than when they took out their mortgage so they can't refi again and may have trouble or find it impossible to sustain the adjusted mortgage rate on a house that is worth less today than when they bought. Furthermore, selling isn't much of an option since it's unlikely they will find a buyer for their home right now or anytime soon. We cannot afford to allow 10,000 foreclosures daily to continue. This would put an end to the vast majority of these foreclosures. This action would directly benefit mortgage holders of course, but everyone in the nation would benefit as well because of the many residual benefits of this action. Methinks even here at TPM many people do not recognize the magnitude and immediacy of the ongoing catastrophe that is facing larger and larger numbers of our people daily.

    oleeb, you are right to remind me of the ARM's that are out there that will strongly affect the homebuyer's ability to pay. In this instance, it makes sense to rework the mortgage to a fixed, more affordable interest rate.

    During the Depression, as I understand it, the problem was not that there was a home valuation bubble that burst. The mortgage assistance that was offered at that time was essentially designed to:

    1.) maintain homeowner's control of the asset until such time they could afford to resume payment on their own.

    2.) inject large amounts of capital into the economy.

    With this program, we are asking many homeowners to continue making payments on an asset that will forever be valued at far less than the amount of the mortgage. My question (I don't know!) regards the dynamic here as it plays out. Does not the sensible homeowner too often find that it STILL makes sense to cut his losses and abandon this home/investment? I don't understand how this proposed mortgage adjustment has great impact on foreclosures.

    It seems you are otherwise promoting something like continuance of the principal-free mortgage, wherein the home "owner" simply rents the home. This will perhaps work for so long as his payment doesn't surpass rent that might be paid elsewhere. There's no correlation here, however, and therefore no real basis upon which to build an effective policy.

    Ultimately, it appears you are arguing to inject major $$ into the economy by means of helping the middle class pay their bills and thus protect themselves from foreclosure/bankruptcy until such time the economy recovers and they can again be secure in their jobs and income. To direct this solely and specifically at the mortgage payment seems to be unnecessarily limited in scope.

    Finally, as a father whose son (34 years old; 13 years at his job) was just laid off without good prospect of finding any other family-supporting employment anytime soon, I am well aware of just how dire is the circumstance in which we find ourselves.

    How are the banks' interests satisfied by government-sponsored lower rate mortgages? Homeowner Jones owes $250,000 for his home that is now worth $180,000. Does the government give him a low interest rate on a $250,000 loan so Jones can pay off the bank? What would motivate Jones to go $70,000 in the hole to the government, rather than have the bank eat his lunch?

    On the other hand, if the government only offers Jones a low interest loan for the current $180,000 value of his house, and Jones can't pay off the bank, what keeps the bank from putting a lien on Jones or starting foreclosure on the unpaid bank mortgage? Now Jones has legal expenses up the kazoo fighting the lien. Why would Jones take this deal either?

    The government needs to facilitate discussion between Jones and his bank for the bank to refinance first. Somehow the loss of home value has to be addressed, and the govenment entering as a third party will not fully address this loss and will likely lead to great legal costs.

    I am for the public works aspect of the post. Enjoyed the post.

    It's too bad the government didn't react in a timely fashion to the mortgage crisis but I wonder if the economic disaster hasn't moved in so many additional directions that your solution is too much for one problem and too little for others.

    My mortgage will be paid off in just a few years but what I really need now is a car. Can we have a choice here? Can the government buy me a car instead? I don't want more long term debt.

    But bluebell, most people aren't going to have their mortgage paid off in a few years. Most people got their mortgages in the past 5-10 years. It isn't about giving people freebies. It's about stabilizing the market for homes (where most American's only tangible wealth lies). By adopting a policy such as this all homeowners benefit when the market stabilizes and the value of your house stops dropping for one thing and over time, the value of the property will grow. If you are comfortable with the terms of your mortgage and paying it off you wouldn't be forced to refi.

    There could be a holiday, as it were, on payments if necessary in certain cases but for most people the combination of the interest rates and inflated value of their homes when purchased has been a toxic mix. Refinancing pays off the old mortgage and new terms are set. There are several options on how to handle any difference between the new and old mortgages. First, the government could pay the difference which is a much cmaller sum than their current preffered approach of simply assuming the entire bad debt. Second, they could make the bank eat it as a consequence of their knowlingly making loans that could not be paid. Or third, a combination of these approaches is possible as well as other remedies for handling any discrepancy. Many people who are eeking by right now will not be able to afford their mortgage payments if anything goes wrong, one spouse loses their job or that sort of thing. By lowering their payments through refi's that pressure is lessened, but we also could save millions from actually going under. At 10,000 foreclosures daily with no end in sight that means millions of people are looking at dire straights in the next year if something doesn't change. For those who no longer have an income this would not be a panacea. The benefit of this approach is keeping millions in the homes they live in, stabilizing the market, and giving our people some basis for recovery that also makes money for the government since all the money is repaid with interest.

    Oleeb - what price will the government buy my mortgage from Citibank for? It's a $500,000 mortgage and I paid $500,000 for my house last year. Will the government buy the house from Citi at the market price? Or at a haircut such that Citi loses money?

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