General Question

Judi's avatar

About home mortgages and bailouts?

Asked by Judi (37641 points ) October 30th, 2008

Some say that we should bail out home-owners by buying their troubled mortgages and renegotiating with the homeowner at the lesser value, having the tax payers eat the loss. If we do that, it doesn’t seem quite fair to those that struggled and scrimped and kept their mortgage payment up, and are still paying a mortgage at the inflated value. Would this work? We renegotiate at the lesser value, but put a lien on the house for the amount that we discounted. If the market comes back, and values go up, and the homeowner goes to sell the house they have to pay back the amount that the taxpayers “ate” with the profit. It’s just an idea, I’m not saying I’m sold on it, but I would like to hear pros’s and con’s.

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49 Answers

asmonet's avatar

Seems good to me.

Bri_L's avatar

Hmmmm. I like the sound of that.

PupnTaco's avatar

That is the existing Hope for Homeowners plan under the FHA – the lender modifies the loan to 90% of the current market value (which BTW is no fault of the homeowner), then when the homeowner sells, the bank keeps any profit from the sale. Participation in this program is voluntary – it’s up to each lender to opt in or out.

IchtheosaurusRex's avatar

Astute as usual, Judi. Write Washington.

jvgr's avatar

Idea is good, but the entire concept seems dubious at best.
Will everyone be eligible?
How will a decision be made as to who is eligible to receive help?
Don’t the many fraudulent lenders have some responsibility here?

Judi's avatar

See Ivgr? Us big picture folk need detail people like you to help us sense reality a bit. I wonder if guidelines could be written though. Humm…. It would take one of those engineering minds to figure it out.

Mizuki's avatar

Right now, there is not consensus, so most banks are not modifying or short selling (unless they approved the deal a month ago or before) all are waiting for the Gov to make an offer on those stinking toxic upside down mortgages. Banks think the Gov will pay more for the homes than they can get on the so called Free Market.
1. If nobody bails out homeowners, they will and are walking away, from their homes that they owe more than the home is worth, and foreclosing. When your neighbor forecloses it also drops the value of the responsible neighbor’s home (the guy or gal that did not over extent or did not take cash out for diamomn-studded Benoit balls, ect.) Home values are determined by sale of like properties in the neighborhood. We are all in this together, and if not renting, on the hook bigtime.
2. The loan modifications I have seen are at 90% Loan To Value of a current FHA appraisal. Home Bought 350k in 2005, today appraises 200k, the promissory note (amount owed) reduced to 180K (current value divided by 90%). The Gov will then share in any increase of value in the home, and you may get a 1% or %% interest rate, depending on how good you are at negotiating, and how much the bank does not want the home.
This whole thing is very new and I reserve the right to correct myself as guidelines change. My advise is to get a lawyer—it will be worth it in this case. The guidlines change every day.

My 2 Cents is that home values will settle back at 1997 levels, pre credit boom, and rates will be around 7–9% when the dust settles.

jvgr's avatar

Judi: “See Ivgr? Us big picture folk need detail people like you to help us sense reality a bit. I wonder if guidelines could be written though. Humm…. It would take one of those engineering minds to figure it out.”

A big picture person who can’t assess their own big picture at a rudimentary level is a no picture person. :-)

Judi's avatar

ivgar;was that an insult?

Judi's avatar

i see obstacles as things to overcome, not road blocks.

Zuma's avatar

If I recall correctly (and I’m not totally sure of this) McCain proposed that we use a big chunk of the bailout money to pay off people’s troubled mortgages in full and then relend to them on more favorable terms. This was shot down because there was (I think) no provision in the bailout authorization legislation for lending directly to individuals. If I understood it correctly, this would have been a very bad leveraging of bailout funds.

Recently, there have been some proposals geared to the roughly 3 million people still out there stuck in predatory loans. These include people with negatively amortized loans, adjustable rate loans with attractive teaser intro rates but unsustainable maxed out rates, loans with baloon payments, deferred payment plans that eventually trigger the fully amortized payment amount, and other predatory gimicks. The idea is to get people into fixed rate loans that they can afford and are not likely to walk away from. This may entail some renegotiation of the principle to reflect a diminished market value, or reamortization of the loan over 40 years instead of 30. The bailout funds would be used to cover the difference. The question is, how much of this loss, if any, should the company have to eat?

Anybody still out there paying absurdly high interest rates should be able to get in on the program and their loan modified. Personally, I don’t see people who need bailing out as any less holy or virtuous than thrifty people heroically struggling to pay their mortgage against all odds. The point of the bailout is to reward and punish people for their personal morality. It is to stop the foreclosures that are depressing everybody’s property values, and undermining the value of real estate-backed securities in the secondary markets. In my view, this impulse to personalize systemic financial problems so that they become about personal morality terms is totally counterproductive.

Right now, they are talking about temporary fixes, like adjusting interest rates for five years. But that, I think, is because the Republicans are still in charge and they are playing to the industry. Once the Democrats get in, I would expect the terms to become more favorable to homeowners. After all, if the loans are unsustainable, why fix them for only five years? In my view, companies who engaged in predatory lending should be forced to disgorge some of their profits in the form of reduced future earnings. All it means is that they will be earning at normal rates rather than reaping a windfall because they got people hooked into unfavorable deals.

One good thing about this program is that, unlike refinancing, loan modifications don’t entail points, closing costs or fees. Its an adjustment just like when your adjustable interest rate goes up or down. There is, I am told, a lengthy application process.

http://www.businessweek.com/bwdaily/dnflash/content/oct2008/db20081029_246033.htm?chan=top+news_top+news+index+-+temp_top+story
http://www.bestsyndication.com/?q=node/18793
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/10/25/BUA213LRDM.DTL
http://www.businessweek.com/magazine/content/08_42/b4104000057649.htm?chan=top+news_top+news+index+-+temp_top+story

Judi's avatar

But Zuma, if Couple A renegotiates and gets $20,000 knocked off their loan and party B continues to pay the inflated price, when the market turns around and party A sells their house in 15 years for more than they paid for it then they have $20,000 more equity than party B who kept paying the inflated price. It doesn’t seem right for party A not to have to pay back that additional equity when they sell.

galileogirl's avatar

A more likely scenario would be a 90 day moratorium on foreclosures to let things calm down a la Roosevelt’s bank holidays and then a renegotiation of mortgage interest rates and terms (no interest only or ArMs) NOT lowering mortgage balances to current values. With a reasonable rate people should be able make their payments. If your mortgage is upside down you need to look at it like rent not as a get rich quick scheme. Eventually the value will rise and unlike rent you will move on one day with money in your pocket.

If you were one of those idiots who sucked the equity out of your home in order to make risky investments, well I guess you learned a good lesson.

Zuma's avatar

@Judi
So, should we let the whole system crash just so couple B won’t have their feelings hurt because couple A made out better than they did? Or rather, because couple B didn’t have the sense to renegotiate their deal when they had the chance?

SquirrelEStuff's avatar

@Monty

You said,“It is to stop the foreclosures that are depressing everybody’s property values.”

Yeah, the foreclosures might depress property values, but they were artificially inflated in the first place.

A renter, like me and the many other people, would be cheated out of the chance to buy a house at true levels, not the inflated value we have now.

I do not support a bailout for home owners, nor do I support a bailout for the banks. I think the root of the problem, stems from the fact that our money is created out of debt from the Federal Reserve. The increase in mortgage debt, since 2001, is equal to the Fed’s increase in the money supply.

“From now on, depressions will be scientifically created.” — Congressman Charles A. Lindbergh Sr. , 1913

Zuma's avatar

@Chris6137

If your think your chances of affording a house are going to be better during a depression, because prices will be at rock bottom, wouldn’t that be because the rest of us had been “cheated” out of our jobs? If you don’t mind my asking, what kind of recession proof industry are you employed in that you would have sufficient income be able to qualify for a home loan any better than you are now?

galileogirl's avatar

Actually Monty, when times were better I could never afford a 900sf home at $750,000 in my city. So I stayed in my rent controlled apartment. As I looked at small condos in the suburbs at $250.000 and rentals approaching my city place I saw no option for lower living expenses in retirement.

However I am 2 years from retirement and in the suburbs where my family lives those condos are 50% of what they were 3 years ago. With a 20% down payment my mortgage payment would be half my current rent. The only thing holding me back is the cost of the 3 hour round trip commute. If we are still in the real estate depression in June of 2010 it would not only be possible for me to buy for the first time in my life-it would be stupid not to.

jvgr's avatar

Judi: “ivgar;was that an insult?” No.

AlfredaPrufrock's avatar

I think offering 30 and 45 year mortgages at fixed rates, bringing down credit card rates to single digits, and doing away with universal default will interject sanity in the proceedings.

Did you know that if you pay all your credit cards on time, but are late paying your phone bill or utility bill, the credit card companies can jack your rates up to whatever the default rate is?

Zuma's avatar

@galielogirl,
Actually, I sympathize. I was stuck in renter limbo until I inherited a little money a few years back. That money became the equity in my house, which has now all been wiped out due to depressed real estate values. The point I am making is that it is difficult enough just to make things work, playing into people’s envy and resentment only complicates the matter.

The fact is that the world economy depends on Americans spending like drunken sailors. We have only been able to do this because the appreciating equity in our homes bolsters our consumer confidence. Just pray that the system holds together for another 2 years so you don’t get laid off before you can retire. Here in California we used to think that unionized State jobs were immune from layoffs, but now positions are getting cut permanently. If they can go, so can you, especially if you don’t have a union to make sure that people with lower seniority get cut loose first. It is perfectly legal for companies to lay off higher-earning older workers for financial reasons.

@judi
I just called my lender to ask why my interest rate has gone down but my payment has gone up. It turns out, somewhere in the fine print there is a clause that adjusts the payment amount upward each year by 7.5%. Apparently, I am still on my introductory rate. I asked them if they do mortgage modifications and they said yes, but I had to document “hardship”; i.e., an inability to pay my current mortgage. They wanted 2 years worth of bank statements and tax records. So, I am going to wait until these FDIC programs are more fully developed.

I’ve already started to receive phone solicitations from companies offering to handle the modifications negotiations on my behalf. After talking with the company, I can see how it would be to my benefit to have a professional negotiator do this for me, especially if they can get my payments down to what they said they could (e.g., 4% interest, fixed). The problem is they want a $4,000 upfront fee, which strikes me as two to four times what their service is worth.

SquirrelEStuff's avatar

@monty

I agree that it would be because people would be “cheated out of their jobs,” but I think we are really being cheated by the people that control the money and the resources.

I am a union electrician, which is not a recession proof job, but I am pursuing alternative energy, which may help during these times.

I don’t understand how you can say real estate values are now depressed. Between 1998 and 2005, home prices increased by 45%. This was due to the Fed’s policy of artificially cheap credit, that caused the housing bubble which is causing Americans grief. One may argue that it was due to deregulation(by Clinton btw), but none of this would be possible if it wasn’t for the Fed’s ability to adjust interest rates, which dictates what the dollar is worth and the price of products and services.

AlfredaPrufrock's avatar

I have to think that part of the problem is that we’ve stopped thinking of a house as shelter and started thinking of it as an investment. Like the Dutch Tulip Bubble, there is no sure thing. Not in stock, not in real estate.

Zuma's avatar

@chris6137
“I think we are really being cheated by the people that control the money and the resources.” Well, that’s another story entirely. The monetary supply is, of course, managed on behalf of the people with the most money.

If interest rates are set too low, it causes inflation, which redistributes wealth from creditors to debtors. Rich people can’t have that; hence, the Fed tends to ratchet up interest rates at the first hint of inflation. If interest rates had been set too low, as you allege, there would have been a concomitant increase in general inflation in the rest of the country. Strangely, only housing and energy prices increased, but for quite different reasons.

Even in 20–20 hindsight it is difficult to imagine how interest rates could have been managed differently and still offset the contractionary drag posed by artificially high energy prices. So, unless you can envision such a scenario, there really is no basis for saying that housing prices are artificially high.

Given only two options (raising or lowering rates), monetary policy is an exceedingly blunt instrument. Its very difficult to predict how rate changes are going to play out through the economy. Inevitably, somebody’s ox gets gored even when things are managed well.

galileogirl's avatar

I know what I am saying will not be popular but while it is easy to blame THEM for doing this to us, honestly were we paying attention? A year ago could you identify Simon Cowell? How about Ben Bernanke? Were you aware that the maturation date of the first interest only and balloon payment loans was at hand? Did you know that the national debt cap had been raised 3 times in 7 years? Did you know what the prime rate was? Did you think that “free money” govt checks was a good thing? If you didn’t it was because you weren’t paying attention.

Maybe this experience, which is just beginning, will teach us that we bear some responsibility. and to pass on thrifty living as an American value. We also need to pay attention to whom we elect for president and Congress. It didn’t matter who Bill Clinton slept with, it did matter that he started to repair the economy. It also didn’t matter if a Congressperson was a Republican or a Democrat. It did matter if s/he refused to support a reasonable economic plan because the other party initiated it.

So don’t go off blaming them, WE ARE THEM!

Zuma's avatar

@galileogirl
How about keeping focused on an analysis of the system rather than personalizing it through blame? It’s not my fault that a president I didn’t vote for deregulated the financial industry to an extent that crooks were able bring it down. It’s not my fault that a lot of people were the victim of predatory lenders and defaulted their loans. It’s not my fault that the bottom has fallen out of the real estate market, wiping out my home equity and leaving me on the brink of insolvency. It’s not my fault that I don’t have 20–20 hindsight.

We really need to get away from casting our systemic problems in moralistic terms. Blaming leads to scapegoating, and self-blaming ultimately leads to thinking that when bad things happen to you its because you deserve it.

Judi's avatar

@gail;
More pearls of wisdom. You and I remember when prudence and thrifty were virtues. It’s sad when 9/11 happened and GW says, what America needs to do is go shopping.

SquirrelEStuff's avatar

@monty
Interest rates were low. Gold and oil almost quadrupled. The dollar lost the same amount. Notice how now that the dollar is strengthening, oil is going down. Gold is going down.

“Only housing and energy prices increased,...”
Have you bought food recently? Have you bought anything lately? General inflation is high, but the CPI no longer includes energy or food, so we don’t know what the inflation rate is.
Interest rates should be managed differently by not having a private central bank set them through a board that has been selected by Ronald Reagan, George Walker Bush, Bill Clinton, and George HW Bush. “The Fed artificially lowered interest rates, which misrepresented economic conditions and misleads people into making unsound investments. Investments that would not have been profitable beforehand suddenly seem attractive with lower interest rates. These malinvestments would not have been undertaken had the business world been able to view the economy clearly instead of falling for the Fed’s false signals.”

“In the short run, a false prosperity takes root. Business expands. New construction is everywhere. People feel wealthier. This is why there is always such political pressure on the Fed to lower interest rates around election time. The prosperity comes in the short run, and the painful correction comes much later, well after people have cast their votes. ” Quotes taken from The Revolution: A Manifesto

The bottom line is, we need to stop looking for solutions, and start identifying the true problems first.You admit that few control the monetary supply. The same people control the resources and the land. If they dont control the land, they’ll use eminent domain. If you control these, you control the people. If you control the money, you control how long people have to work to afford things. If you control the resources, you control the supply, which controls the prices. If you control the land, the money, and the resources, you control the slaves. People can’t afford to be kicked out of their homes, because if someone else doesn’t own it, the government does, and if you try to trespass, you go to jail.

Mortgages should be available to everyone. And by that, I mean that people shouldnt have to work 30 years, to afford some land and a home, while our defense department spends trillions a year, the war on drugs costs 50 billion, and we pay over $1.2 Billion in interest alone, DAILY. Something seems a lil backwards here.

Mizuki's avatar

Since we are now on the topic of blame, it seems the responsible adult thing to do: identify what went wrong, and who allowed deregulation, and who allowed banks to extend 40–1 leverage (Phil Grahmn, Bush, Greenspan) not to point fingers….Then those responsible (as in the party of responsiblity) heads need to roll.
Monte’s idea that we need not hold to account the criminal element here. If someone robs your home, steals your stuff—please don’t lay blame, since it leads to scapegoating.

Imagine if Bill Clinton allowed banks to leverage 40–1? Monte surely would not lay blame, right?

Those of us that are in this industry saw this coming back in 2005, it was no secret, and it was the largest redistribution of wealth in the history of the world.

SquirrelEStuff's avatar

I apologize if the topic switched to blame. Im not trying to make it a blame game, but all I keep hearing is solutions to the problem at hand, not solutions to the root problems that make it all possible.

I find it funny that on money it says, “In God we trust.” It should say,” In the Fed we trust.”

laureth's avatar

Nobody can pay attention to everything. Whatever the next horrible meltdown to come down the pike is, it’s likely that we’re not paying attention to it now either, GalileoGirl.

galileogirl's avatar

Monty: My answer was not directed at anyone in particular but post after post was “what they did to me” and that is just too facile. All I said was most people should have known what was coming if they were paying attention and knowing what was coming would have allowed people to make better decisions. I just don’t buy the victimhood that I saw here.

I paid attention. When I was offered a slick deal on a house, I said no. When that $600 showed up in my bank account, I put it in a CD. I increased my savings to 20% of my net income. I kept my 10 year old car. I sacrificed to qualify for a job that would be recession proof. Since 2000, I watched what was happening and prepared for it. Not only that, I tried to educate others. I have shared this information with hundreds. Since an economics class is required for high school graduation in virtually every state, we have all been given the tools, we all know economics are important but most of us have chosen not to pay attention. We better start now.

galileogirl's avatar

Laureth what were you paying attention to that was more important than your future? Read any good Books? How about books about common sense economics, not the get rich quick scams. Do you have any favorite TV shows? An hour a week with Suze Orman is more worthwhile than The Sopranos or Sex and the City or whatever floats your boat. Read People Magazinr or Lucky for fashions, why not US News & World Report. Those choices might not be as amusing or exciting but wouldn’t we like a little less excitement now. Hold on to your hat, you’re in for a bumpy ride!

Zuma's avatar

@Mizuki,
“Monte’s idea that we need not hold to account the criminal element here.”

Whoa there, I advanced no such idea!

In my view, blame is vastly overrated. It tends to become a form of cheap emotional self-indulgence which people tend to preoccupied with for it’s own sake, at the expense of solving the underlying problem. Blaming tends to reduce complex systemic problems to questions personal moral failure. In the case of the recent financial meltdown, you get people trying to lay it off on Wall Street “greed,” as if the problem were due to the bad character of a few bad apples, rather than a politically motivated initiative (Bush’s “ownership society”), enabled by the conspicuous removal of regulations and oversight.

This is not to say that personal moral failings are unimportant and need never be addressed, but that shame and retribution are of limited utility in correcting either the faults of individuals or the systems they inhabit. If someone robs your home and steals your stuff, it may be emotionally satisfying to catch the person and throw them in jail, but doing so neither rehabilitates the person nor solves the underlying problems that set him up to offend in the first place. In this respect, blame tends to limit you to reactive rather than proactive approaches to problems.

Let me be clear, we should hold people accountable for their criminal acts. Unfortunately, many of the things that contributed to the current economic crisis were either perfectly legal or semi-legal, because the industry was able to get the regulations governing it repealed, or watered down, or put on a voluntary basis. As satisfying as pointing fingers at Graham, Bush or Greenspan may be, it doesn’t really tell you what policies we really need. Likewise, tossing out the “responsible party” may provide a necessary condition for change, but it does nothing to clean up the deeper corruption of a money-dominated politics, which enables corporate interests to trade campaign contributions for political influence.

laureth's avatar

@galileo: I don’t watch any TV shows. However, I do know how to grow a garden, preserve food, spin yarn, make soap. If the bumpy road turns into a two-track and then fades into the wilderness, I and my homebrewing husband will have skills to live on and trade.

That said, my expertise is not in economics. My husband’s is, and he saw this coming. However, what if the next thing to come down is not something as remotely predictable as this was? If people who do watch TV all the time and don’t like to read or do research (“it’s haaard!”) don’t know something, is it our job to bail them out when they get hit? Not everyone’s interest or observation lies in the area from which the next disaster will hit, is my point. And the banks weren’t going to tell people, seeing as it was in their best interest to obscure the truth.

If even Alan Greenspan didn’t see the economic crisis coming, well, then it’s a lot to expect from Joe Sixpack. That’s all I’m trying to say.

galileogirl's avatar

Poor old Joe, if he isn’t mentally challenged he needs to put down the weights or beer or whatever gave him his name and take some personal rsponsibility, no matter how haaard it is.

Zuma's avatar

@galileogirl,
“Since an economics class is required for high school graduation in virtually every state, we have all been given the tools…”

There wern’t any economic courses when I went to high school, much less an economic requirement. When did this come in? And what does it cover? Does it get into macroeconomics—i.e., fiscal and monetary policy, and things like Keynes’ paradox of thrift? I certainly don’t see any evidence of economic ideas being prevalent in the America.

Someone mentioned in passing that civics is no longer required at the high school level.

galileogirl's avatar

Economics was required when I was in high school in the 60’s and I’ve been teaching it for almost 20 years. Civics is one semester and Econ the other in 12th grade. They may be called different things, our Civics is called Americam Democracy because there is a lot of emphasis on the Constitution. But maybe it is not in every school. Bush didn’t seem to be very familiar with it, but then he went to private school where economics is pass ‘cause Daddy pays.

I start off with TINSTAAFL>comparative economies>micro>macro. The last few years we have looked very closely at theory v reaiity.

SquirrelEStuff's avatar

@galileo

What is TINSTAAFL?

Zuma's avatar

TINSTAAFL=There Is No Such Thing As A Free Lunch. Other than that, I’m not sure.

Mizuki's avatar

@laureth—everyone that was paying attention saw this coming back as early as 2003–2005. In August 2005 I began warning my client base—many back then though I was crazy. Many of those folks are now crazy upsidedown.

Anyone that says they did not see this coming, did not see it because they were blinded by their idealogy—Greenspan said as much, that his 40 years were guided by an idealogy that has been proved wrong.

laureth's avatar

Mizuki, I don’t disagree.

On the other hand, LOTS of people don’t pay attention. They’ve probably cut in front of you while they were talking on their cell phone.

Mizuki's avatar

And not paying attention is very costly for us as a nation. See the last 8 years

Zuma's avatar

I’m not sure that paying attention does you much good if you don’t have a sufficient understanding of economics to make sense of what is going on.

Galileogirl says above (and elsewhere) that high school economics courses have been mandatory since the 1960s. If TINSTAAFL is what I think it is—i.e., a zero-sum view of economics—then it may well be that several generations of Americans have been miseducated in the area of economics.

National economies are not like household pocketbook economics. That is to say, you can get a free lunch through increasing the velocity of money, through multiplier effects, and through deficit spending, demand stimulus through taxing and spending,at least in the short run. Virtuous saving, on the other hand, take away that lunch, as can balanced budgets, and reduced government spending.

I am curious as to what kinds of economic educations people have and what you can to take for granted about your fellow citizen’s understanding of economics.

Do you think I should ask this as a separate question?

Bri_L's avatar

absolutely! I have brought it up as a sub point many times.

Zuma's avatar

@Judi,
I’ve just run across a spate of articles that gets into the nuts and bolts of the FDIC proposal deeper. This one is a must-read for a good solid briefing on where things stand.

http://www.californiaprogressreport.com/2008/11/why_the_newest.html

It discusses, among other things, the unfairness problem you raise. Apparently, if the only people who qualify for mortgage modifications are people who have missed a payment and are heading into default, you could get a lot of people purposely missing payments in order to qualify. They could miscalculate and go under, making everything worse.

Right now the average interest rate in the country right now is about 6.25%. The fairest thing would be to lower them to 4% across the board, with the government buying them up, doing the adjustment and putting them back in Fanny Mae and Freddy Mac. Unfortunately, this not part of the official proposals yet. The article above has a wealth of statistics about the percentages of people in trouble, etc.

The article below speaks more directly to proposals to address the fairness problem that Judi raised earlier. It’s got some very informative links in it.

http://www.marketwatch.com/news/story/Homeowner-Relief-Getting-It-Right/story.aspx?guid=%7B0758B71E-BB4F-42CF-B20A-6BAEAE5D6B82%7D

SquirrelEStuff's avatar

@monty

I’ve heard McCain mention what you have, about government buying up mortgages, doing the adjustment, and putting them back in Fanny Mae and Freddy Mac. Isn’t that also a socialist thing to do? What is the expected return on that? What is the probability that it will gain and not lose? What other risks does that involve?

Zuma's avatar

If they do it across the board—i.e., don’t try to pick winners and losers—then everybody who wants one can get a 4% home mortgage and/or a write-down of the principle to reflect depressed market prices. If I understand it correctly, the government will be a kind of pass-through. That is, they will buy the mortgages (maybe for less than face value, since these are distressed loans) and sell them back to Freddy and Fanny who, in turn, will bundle and resell them as securities on the secondary credit markets. Since the government will be turning the loans over instead of holding them, there won’t be much drain on this revolving fund. Its the investors who will bear the burden of the lower interest rates in the form of a reduced future income stream. But don’t worry about them, they already made their killing in creating this mess, and it is not too much to ask of them to accept a rate that is fair by historical standards.

Now, if the government funds the write-down of principle to reflect current real estate prices, there could be a drain on the fund. But, as you can see from the links above, there are proposed mechanisms for the government to recover any windfall profits if they go immediately sell their property. This gradually decreases with each passing year up to some limit.

A 2% cut in mortgage interest puts money in your pocket just like a tax cut, so the demand stimulus will help strengthen the economy and expand the tax base, as it provides relief to individuals. It also helps the investor, because even though these new loans earn less, they are much more secure and predictable. Currently it costs more to foreclose than to do the workout, because a foreclosed property quickly looses value, and drags down the property values of its neighbors. Also, once the foreclosures stop, the real estate market can recover, home equity can appreciate, and stability and prosperity will ensue.

We more or less have to do something like this before the recession deepens and begins to tip the 10 million troubled mortgages that are currently out there into foreclosure. If that happens it will set off a cascade of failures that could bring down the whole world economy.

Yes, it is a socialist thing to do, but in nationalizing Fanny and Freddy, we have already committed ourselves to “doing the socialist thing.” We have already bailed out securities investors. So, why go half way? Why not go to the root of the problem, bail out the debtor on a revolving fund basis, and put the whole system on a more stable footing?

Socialism doesn’t mean you have to have total state control. You could run the mortgage credit industry like a public utility, where you have strict limits on interest rates, and a modest but guaranteed rate of return. You would still have competition, but you wouldn’t have companies trying to make huge profits redlining, predatory gimmicks, or gouging their customers. Currently, the CEOs of our major corporations pay themselves hundreds of millions of dollars each—all of which is wasteful administrative overhead that does nothing to improve performance or customer service. In this respect, the corporate elite have a conflict of interest with the public good. Socialism would eliminate this legalized theft, and create a regulatory environment where corporations would be restrained from ripping off the public.

(As you can see, the rich have very good reasons to dislike socialism; and for this reason, I think that socialism has gotten a bad rap.)

Zuma's avatar

@galileogirl,
@BriL,
I’ve asked a separate question about what kind of economics education Americans have see link below).

http://www.fluther.com/disc/26670/how-well-do-americans-understand-economics/#quip285138

Bri_L's avatar

cool thanks!

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