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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 welfare]
Reply-To: pfoldes () eidmgt com


The $ 700 Billion bailout number got me to thinking, and doing some 'back of
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 in default. Not all of those in trouble deserve to be 'saved' by the Government, as some are not owner occupied homes, but mortgages for flippers' who speculated in flipping real estate - who chose to speculate on the market, and social policy
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 payment
status) are by owner occupants.

Let's assume - as a true 'worst case' scenario that ultimately the number of mortgages in trouble for homeowners who occupy their homes doubles - that
would mean 8 million homeowners would need help.
Let’s assume that instead of a bailout of the financiers as now proposed, the
bailout was focused on the owner occupants instead.
Let's assume the government subsidized the payment of those occupants by $ 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/ yr) x 5 (years). = $ 480 Billion spent overall over 5 years; BUT NOT ALL AT ONCE

Many benefits of focusing the bailout as the compelling numbers above suggest:

1) costs much less on an absolute basis, and 50% less on a 'present value
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 over 60
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 Billion at a 5%/yr discount rate, assuming government's cost of money for this special
purpose (say from a special borrowing facility).

2) The benefit would go to the taxpayers rather than financial speculators.
Let's remember: owner occupant homes are taxpayers!
Not only is the US Treasury (aka American taxpayers) benefiting - but so
are local taxpayers; i.e. the local municipalities who provide everyday
services to our citizens - thus keeping local governments and neighborhoods better off than if 'bad loans' are allowed to be foreclosed, and empty homes deteriorating
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 reduced, as relatively more 'worthy' owner occupants are rewarded with government aid, not financial engineers whose products blew up due to their avarice and lack of
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 special economy stimulation intended payments on relatively short notice, so it could be tasked to send out the monthly payments - especially electronically to
mortgage holders for owner occupants.
As owner occupants know who they send their payments to monthly; the current services (whoever it may be - no matter who owns the ultimate mortgage) IRS could be notified to send the $ 1000/mo payment (or credit electronically, if the homeowner is paying electronically now) - thereby obviating the problem of having to target the bailout now, where the ownership of the assets is murky at
Thus less of the bailout is likely to go to parties who don’t deserve it
-as  homeowners do know where payments are due, whereas ownership of
current collateralized debt obligations is not so readily ascertainable. NOTE: according to news reports, in some jurisdictions judges have voided attempts to
foreclose by prominent  purported mortgage holders as they had no proof
they were valid owners of the mortgages being foreclosed on - due to the sloppy bookkeeping by Wall Street mavens. According to these news reports now central directory exists of the mortgages that are contained in the multiple trusts which served as the finance vehicles for these collateralized debt obligations.

It seems that the benefits of this direct approach to helping the taxpayer owner occupant home owner is manifestly more beneficial from a social polity; and financial responsibility perspective than what has been proposed by an
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 for sure).
Paul Foldes
Disclosure: Writer has some experience in business, finance 'in the real world' aka outside the Washington Beltway.

Paul Foldes
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)
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