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a modest proposal for mortgage crisis bailout; 50% cost saving - if focused on home owners instead of financial engineers welfare]
From: David Farber <dave () farber net>
Date: Sun, 21 Sep 2008 10:39:39 -0400
Begin forwarded message:
From: paul foldes <pfoldes () eidmgt com>
Date: September 21, 2008 10:10:32 AM EDT
To: David Farber <dave () farber net>
Subject: for ip - a modest proposal for mortgage crisis bailout; 50%
cost saving - if focused on home owners instead of financial engineers
Reply-To: pfoldes () eidmgt com
The $ 700 Billion bailout number got me to thinking, and doing some
the envelope' calculations. Unless I am overlooking something big, my
calculations suggest an approach quite different from that of the
Administration, which may help taxpayers more than the current
approach of the
Administrations - which helps the financial industry but not homeowners.
According to public reports, there are currently 5 Million mortgages
Not all of those in trouble deserve to be 'saved' by the Government,
are not owner occupied homes, but mortgages for flippers' who
flipping real estate - who chose to speculate on the market, and
would not warrant saving their investments from going bad.
Let's assume though that as a 'worst case' scenario, that of the 5
Million mortgages now in
trouble; 80% of the current mortgages in trouble (foreclosure or late
status) are by owner occupants.
Let's assume - as a true 'worst case' scenario that ultimately the
of mortgages in trouble for homeowners who occupy their homes doubles
would mean 8 million homeowners would need help.
Lets assume that instead of a bailout of the financiers as now
bailout was focused on the owner occupants instead.
Let's assume the government subsidized the payment of those occupants
$ 1000/mo for 5 years; enough time to sell or refinance those homes in
an 'orderly manner' in a stabilized home market.
The cost to the government would be 8 Million x $ $1,000/mo x 12 (mo/
x 5 (years). = $ 480 Billion spent overall over 5 years; BUT NOT ALL
Many benefits of focusing the bailout as the compelling numbers above
1) costs much less on an absolute basis, and 50% less on a 'present
basis': $ 480 Billion vs. $ 700 Billion (46% less on an 'absolute'
cost basis) - as payment by the US Treasury is made on a monthly basis
months, vs. all up front, now.
as the $ 500 Billion would not have to be spent upfront, contrary to the
present proposal - the present value of such $ 480 Billion is $ 376
a 5%/yr discount rate, assuming government's cost of money for this
purpose (say from a special borrowing facility).
2) The benefit would go to the taxpayers rather than financial
Let's remember: owner occupant homes are taxpayers!
Not only is the US Treasury (aka American taxpayers) benefiting - but
are local taxpayers; i.e. the local municipalities who provide everyday
services to our citizens - thus keeping local governments and
better off than if 'bad loans' are allowed to be foreclosed, and empty
thereby negatively effecting neighborhoods, by lowering their over home
By focusing on saving the homeowner rather than the financial moguls,
several societal goals are positively reinforced, including halting of
neighborhood deterioration; and the moral hazard issue is much
relatively more 'worthy' owner occupants are rewarded with government
financial engineers whose products blew up due to their avarice and
prudence in design and monitoring, or other financially speculators.
3) Further benefits of this approach are easier, more cost effective
administration of this program. As IRS recently was able to send out
economy stimulation intended payments on relatively short notice, so
be tasked to send out the monthly payments - especially electronically
mortgage holders for owner occupants.
As owner occupants know who they send their payments to monthly; the
services (whoever it may be - no matter who owns the ultimate
could be notified to send the $ 1000/mo payment (or credit
the homeowner is paying electronically now) - thereby obviating the
having to target the bailout now, where the ownership of the assets is
Thus less of the bailout is likely to go to parties who dont deserve it
-as homeowners do know where payments are due, whereas ownership of
current collateralized debt obligations is not so readily
according to news reports, in some jurisdictions judges have voided
foreclose by prominent purported mortgage holders as they had no proof
they were valid owners of the mortgages being foreclosed on - due to
bookkeeping by Wall Street mavens. According to these news reports now
directory exists of the mortgages that are contained in the multiple
which served as the finance vehicles for these collateralized debt
It seems that the benefits of this direct approach to helping the
owner occupant home owner is manifestly more beneficial from a social
and financial responsibility perspective than what has been proposed
Administration that has demonstrated 7 years of 'industry friendly' (an
understatement) policies across the board.
More certainty, faster stabilizing effect, easier to execute. Iit
would be refreshing if a newly 'changed' Washington under either
Presidential candidate advocated such a common sense approach. I
It would be refershing if 'Washington - aka inside the Beltway' policy
mavens and politicans in position to do something l- ooked at this
alternative scenario, as it may more quickly and effectively stabilize
matters, as the holders of the mortgages (whoever they are, or
wherever they are - id overseas) would be stabilized as to their
financial positions, by guaranteeing the payments on the loans in
theeir portfolios, and the necessity for massive portfolio purchases
would be eliminated at distress prices.
The only losers would be the 'vulture funds' that are salivating over
the opportunity to buy these portfolios from the government at
discount prices; after the government bought them at higher prices
from the current owners (whoever these owners are, since no one knows
Disclosure: Writer has some experience in business, finance 'in the
real world' aka outside the Washington Beltway.
Email: pfoldes () eidmgt com
Phone: (703) 370 0009
Cell: (703) 585 5112
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- a modest proposal for mortgage crisis bailout; 50% cost saving - if focused on home owners instead of financial engineers welfare] David Farber (Sep 21)