Lower Principal on Underwater Mortgages to Market Value

[Non-RedNeck Westsider]

But using this cramdown theory, what's to stop all of the legit borrowers from getting the same benefit? 

Honey, if we stop paying our mortgage and default on the loan, we'll qualify to restructure our mortgage on today's assessment.  So the $75k we're underwater right now, don't worry about it.   Take the check for the mortgage and go buy yourself a nice gold ring, I hear they're retaining their value pretty well these days.

[acme54321]

So to do this "cramdown" procedure the owner would have to declare bankrupcy?

[BridgeTroll]

Jeffrey,  where did I ever say that the lenders should have been bailed out?

Since you didnt say it, should everyone pretend that it didnt happen?

That would make about as much sense as lowering the principal on underwater mortgages.

ah.

So hypocrisy is the same as pragmatic fairness?

Thats a new one.

Acme.  What would be the benefit of keeping millions of homes indebted many times more than their actual value?

Maybe I just don't understand your argument.

If a house is worth a hundred thousand dollars, and over a 20 year mortgage you are going to pay 250 thousand dollars for it, thats a pretty substantial profit as a return on investment.

But if the house is now only worth 40 thousand (100 thousand over at 20 year mortgage)  what is the benefit of keeping the homeowners indebted for the full 250?  Or even the 100k in cash?

Since we are being pragmatic... while not underwater... I have certainly lost a good bit of "on paper" equity.  Please include me in this bailout as I would certainly have more money to spend on the economy if the government would give me back my equity...  I will not sign the petition as written until it includes me and people like me...

[Non-RedNeck Westsider]

BT, just save all of your old tax-notices.  When you want to re-fi or sell, just throw that little piece of paper on the counter and demand that you get at least what it was worth in '07-'08 - or no deal!

[BridgeTroll]

I was planning on buying a new car, a boat, and a motorcycle (all american built) with my home equity.  It certainly makes more sense to restore my equity so I can purchase the goods I was planning on purchasing.

But Nooooooooooo

They just want to limit this to those underwater.  They would garner much more support if they would include me/us in this petition...

[Non-RedNeck Westsider]

Sounds like you'll have to settle for a chinese made car, boat or motorcycle.

[Ajax]

Acme.  What would be the benefit of keeping millions of homes indebted many times more than their actual value?

Maybe I just don't understand your argument.

If a house is worth a hundred thousand dollars, and over a 20 year mortgage you are going to pay 250 thousand dollars for it, thats a pretty substantial profit as a return on investment.

But if the house is now only worth 40 thousand (100 thousand over at 20 year mortgage)  what is the benefit of keeping the homeowners indebted for the full 250?  Or even the 100k in cash?

The example that you've given above does appear to be a pretty substantial profit.  Out of curiosity I went to an amortization spreadsheet and if I've worked it correctly, that correlates to an interest rate of over 11%.  Someone may want to double check my math.  Regardless of that, yes, you can make a tidy profit if you loan money on real estate after doing your due diligence. 

But I think the question boils down to this: who should suffer when an investment goes bad?  All parties to the transaction should suffer.  The borrower loses their home, and the bank loses some of their capital since they made a poor decision.  But in this post-bailout society we live in, the loss is spread among a bunch of people who had nothing to do with the transaction. 

We already have a mechanism to deal with this situation, and as you mentioned in a subsequent post, it's called bankruptcy. 

Be wary of changing the rules too much or you'll see the law of unintended consequences in action.  If you want the lender to take all the risk (if the value of the property declines), but not be able to share on the upside (if the value of the property appreciates), then you're going to see a lot of banks get out of the lending business.  One could argue that with all of the regulatory uncertainty we've seen over the past 3 years that a lot of the banks have already taken themselves out of the lending business. 

[Ajax]

So you loaned money to a person that you knew could never pay you back?  And now you want to whine because of the unfairness of it all?

Maybe once.  Then shame on the welcher.

But twice?

How about millions of times?

Im sorry, no sympathy.  If they didnt have the sense that god gave a beetlebug and just kept pouring the money to people that they knew were deadbeats, then whose fault do you think it was, acme?

Why is it, literally-----according to you----- everyone else's fault except for the people who were responsible for loaning out other  people's money for their own commissions and profit?

This scheme worked out fine as long as property values continued to increase.  And I remember hearing a lot of brokers in the 2003-2006 years saying things like "oh yeah, mortgage your property up to the hilt, use other people's money, of course real estate will continue to appreciate - it's not like they're making any more land!"  During those days, the bank really didn't care so much if the lender paid them back.  They would just foreclose and then they could resell the property and they would be made whole. 

As we've learned, there is plenty of blame to go around.  The government, due to federal programs like the Community Reinvestment Act; greedy borrowers who wanted to live beyond their means; community activst groups who picketed and boycotted lenders unless they increased lending to unqualified applicants; greedy lenders who wanted to maximize returns; greedy mortgage brokers and managers who were bonused on how high they could jack up the interest rate - regardless of how likely it was that the borrower could pay. 

But if the government going to bail out everyone who is to blame, then who is going to learn their lesson and stop doing these stupid things? 

[Ajax]

Perhaps there should be a correlation between Banks that were bailed out and their debtors being made whole.  I know Bush's bail outs came with no conditions but I could sleep fine at night if we put them on retroactively.

I'm not comfortable with one side unilaterally changing the terms of a contract after the fact.  I think that's a recipe for chaos in the financial markets.  The government should have put conditions on the bailout at the time the agreement was made.  Or better yet, they shouldn't have bailed the banks out to begin with. 

[Dog Walker]

Perhaps there should be a correlation between Banks that were bailed out and their debtors being made whole.  I know Bush's bail outs came with no conditions but I could sleep fine at night if we put them on retroactively.

I'm not comfortable with one side unilaterally changing the terms of a contract after the fact.  I think that's a recipe for chaos in the financial markets.  The government should have put conditions on the bailout at the time the agreement was made.  Or better yet, they shouldn't have bailed the banks out to begin with. 

+1  I wonder if would not have been better, both morally and economically if we had let the investment banks fail like we did with Lehman Bros. and used the money spent on TARP to deal with the consequences rather than bailing out the banks.

Moral hazard is real.  And the investment banks and hedge funds that were bailed out have gone right on doing what they did before.

[FayeforCure]

Perhaps there should be a correlation between Banks that were bailed out and their debtors being made whole.  I know Bush's bail outs came with no conditions but I could sleep fine at night if we put them on retroactively.

I'm not comfortable with one side unilaterally changing the terms of a contract after the fact.  I think that's a recipe for chaos in the financial markets.  The government should have put conditions on the bailout at the time the agreement was made.  Or better yet, they shouldn't have bailed the banks out to begin with. 

+1  I wonder if would not have been better, both morally and economically if we had let the investment banks fail like we did with Lehman Bros. and used the money spent on TARP to deal with the consequences rather than bailing out the banks.

Moral hazard is real.  And the investment banks and hedge funds that were bailed out have gone right on doing what they did before.

It's because there were no strings attached..........for example why was the HOPE Act voluntary instead of required?

In Europe, when they did their bail-outs, they also mandated a more equitable compensation of the CEOs rather than the 300 times average worker level that is so prevalent in the US. (in Europe they consider executive pay at 50 times the average wage far more appropriate in lean times, and they are not afraid to mandatesuch because they have public financiang of campaigns)

See, if US government takes corrective action it needs to make sure that when it hands out money, there are strings attached that PREVENT business as usual.

US government is not exercising its oversight and accountability functions in accordance with what they were instructed by the mega-corporate lobbyists that fund their campaigns.

[acme54321]

Perhaps there should be a correlation between Banks that were bailed out and their debtors being made whole.  I know Bush's bail outs came with no conditions but I could sleep fine at night if we put them on retroactively.

I'm not comfortable with one side unilaterally changing the terms of a contract after the fact.  I think that's a recipe for chaos in the financial markets.  The government should have put conditions on the bailout at the time the agreement was made.  Or better yet, they shouldn't have bailed the banks out to begin with. 

+1  I wonder if would not have been better, both morally and economically if we had let the investment banks fail like we did with Lehman Bros. and used the money spent on TARP to deal with the consequences rather than bailing out the banks.

Moral hazard is real.  And the investment banks and hedge funds that were bailed out have gone right on doing what they did before.

Agree with both posts.  Other than I don't know if the TARP funds should have been spent at all.

[JeffreyS]

The problem with letting them fail was not the real estate side it was the money markets.  If they froze the Tarp Money would not have been able to keep the business of the world working.  We just should have had strings.  Lower principals and minimum small business lending requirements would have gone a long way.

[FayeforCure]

The problem with letting them fail was not the real estate side it was the money markets.  If they froze the Tarp Money would not have been able to keep the business of the world working.  We just should have had strings.  Lower principals and minimum small business lending requirements would have gone a long way.

Thank you JeffreyS. Just common sense!

[FayeforCure]

A Domestic Marshall Plan: Forget Going "Big vs. Small," Instead, Go "Simple and Effective"

Posted: 8/31/11 07:11 PM ET

A Marshall Plan for America:

The president might begin by recalling for all of us that, from 1947 through 1951, the US spent $13B (5% of its GDP) rebuilding Europe. At that time the US debt was about the same percentage of GDP as it is today, but our parents and grandparents did not moan and groan that we could not afford it. And, that was on a different continent and included large populations (Germany and Italy) that were just at war with us. The Soviet Union was invited to be included in the aid -- but "Uncle" Joe Stalin preferred the leverage destitution provided him. (a la Stalin, we now proclim "austerity" for America...........how is that not a soviet approach?)

When the Marshall Plan concluded, output had increased by 35%. [One wonders if the rightwing has ever invented a story about why this "government spending" really did not work].

The US needs a domestic Marshall Plan for itself -- $700B over 4 years is about the same percent of GDP as $13B was in 1947.


Obama should chart his own course with clarity or else we will get:


multipoint plans, watered down pronouncements, and the perception of a visionless and rudderless society. When it is complicated, and confusing, the tactic of the rightwing --to deny everything from cigarette-smoking causing lung cancer to more heat-trapping gasses resulting in more heat being trapped -- is easy to create.

No one rallies, no one goes to the barricades, no one steps up to fight if they are uncertain or confused. Nor do droves of people rally to achieve a 1% improvement.

Clarity and certainty are required.

To do so, the president should focus on two and only two proposals, and they each must take account of perceived prior failures, i.e., they must be guarantees not incentives that rely on what side of the bed someone gets up on in the morning to determine if they will be acted upon.

The first is that the proposal must guarantee millions of jobs. The keys are guarantee and millions, not just one million. Without a guarantee, any incentive proposed will be sliced and diced for why it will not work, how much it will waste, who the winners and losers are, and so forth.

At the level of one million jobs, it will be considered OK, but insufficient. Four (4) million should be the minimum -- and recall, the WPA hired 4 million people in 4 months.

At this time, providing incentives for this or that investment will fall on deaf ears -- the American people need to know that several million new jobs are to be guaranteed. The simplest way to do this is in the roads, bridges, electric grid, retrofitting buildings, dams, sewage, water, school buildings -- collectively referred to as "infrastructure". No fewer than 4 million jobs should be guaranteed, either through engaging private companies or, if necessary, through a modern Works Progress Administration, directly hiring the workers.

A corollary of this approach is that it will become highly politically salable to tax the wealthy to pay for those millions of guaranteed jobs. The best economic argument is to get non-productive money transferred to productive -- i.e., the financial activities (i.e, "FAT") tax of 0.5% on financial markets transactions that would generate $100-150B annually and ending the Bush tax cuts for the wealthy, generating another $70B... or, if one prefers, improved enforcement can get some of the $350B in taxes that are owed, but not paid. Together, that is about the amount the domestic Marshall Plan requires.

There is also a potent political argument for this approach -- the financial industry's excesses played a major role in our collapse, the taxpayers bailed them out, it is fitting an proper for them to help bail out the country.

It is time the president gave voice to that sentiment, widely shared by the American people for the simple reason that it is true.

If the jobs are to be guaranteed, there is no even remotely credible argument that the proposal will not work to create them. Since almost all infrastructure work is, by definition, local, the value of the government supported endeavors will be immediately obvious to the entire country -- road by road, bridge by bridge, school by school, community by community.

Let them try to say that money taken from the "private sector" will result in no net job gain -- it will not pass the laugh test. Let them try to say that this is "socialism", I doubt they'd want to sustain that pitch when 4 million plus people are working again.

The second proposal the president should make is guaranteed mortgage modification. So long as housing remains depressed, so long as homeowners have to squirrel away money to make sure they can meet mortgage payments, so long as so many mortgages are underwater, the burst housing bubble will be a drag on the economy.

It is not suggested that the president, in his speech, go into all the details, but he should be clear about what is guaranteed to occur. [One thought is to tie banks' access to the Federal Reserve's loan facility to agreement to modify principal and interest on mortgages, providing the banks a pro rata share of profits when the homeowner sells].

That's it. Guaranteed jobs. Guaranteed mortgage modifications.

A domestic Marshall Plan. To rebuild America.

Of course, we will immediately hear all the reasons why none of this is a good idea.

Ignore them.

The American people would rally in droves behind these two guarantees.

By Paul Abrams, M.D., J.D.,  an entrepreneur who is currently a consultant in biotechnology, and chairs a bioremediation company.

He was formerly President, CEO and Director of one publicly- traded, and another privately-held, biotechnology company, inventor on 12 US patents, co-editor of two scientific books and has published more than 35 peer-reviewed articles. He has been contributor to several journals on issues facing the biotechnology industry and entrepreneurs, an invited speaker at trade and financial conferences, and has testified before Congress on these matters.

He serves as a Board member of the Washington Progress Alliance, the Women's Bioethics Project, the Apollo Alliance (Washington State) and the Economic Opportunity Institute.

He received doctorate degrees in medicine and in law, and a B.A.summa cum laude in Political Science & Economics, all from Yale University. He is a board-certified