The No Oink Solution

The Federal Reserve cut the internal bank lending rate by a further half percent. More fixes at the top. Yet, with 23% of American homes underwater (loans are higher than the equity), what is the government “thinking” about? After all, there’s very little “bailout” money left after the pigs are the top bellied up to the trough. Well more than a day late, and vastly more than a dollar short!

Here’s the “talk in Washington”: The FDIC and Treasury are considering a plan to apply a small portion of the bailout money – estimated to be on the order of magnitude of $50 billion – to encourage lenders to refinance existing mortgages with lower rates for at least five years. Under this plan, the lender and the government split potential losses equally in the event of a default, which the government believes could support as much as $500+ billion of loans. Hey, the fix needs to impact trillions of dollars of loans! Note the disparity between the amount of money being deployed to bailout millions of individual taxpayers versus a pretty small number of corporate biggies: ten to fifteen times more for the companies!

There may be better plans, but here's one (I’ve presented a shorter version before) that multiplies the value of federal bailout money well beyond the federal investment and out-sources vetting and implementation to the originating banks. For those hedge fund managers, in order to protect their toxic balance sheets, who plan on suing banks that readjust mortgages, might I recommend simple Justice Department investigation towards a possible massive prosecution under the federal Racketeer Influence and Corrupt Organizations Act.

Here goes:

1. Impose a 120 day moratorium on foreclosures, and a 60 day grace period (loan extension) for those in current default. Act of Congress.
2. Impose a cap on all mortgage interest rates (I recommend 6.5%) on U.S. based owner-occupied residential real estate. Act of Congress.
3. Congress should direct the Department of the Treasury (and the FDIC) to establish reasonable criteria ("Federal Standards") on what constitutes a creditworthy borrower and the basis of the appraised value of a home.
4. Congress would mandate that the bank or thrift originating the loan (including successors that bought these banks) be charged with dealing in good faith with residential owner-occupied real estate borrowers who meet the above Federal Standards. They would be required, as a condition of maintaining FDIC status, to make the requisite reevaluations, but of course, they can require applying homeowners to pay appraisal fees.
5. The meat of the new law I would suggest: On petition of a federally regulated bank or thrift, based on reasonable due diligence by that lender, Treasury and/or the FDIC would be required (perhaps to a cap to keep the mega-wealthy from benefiting) to pay the petitioning bank a sum equal to the amount that value of the home in question exceeded the loan against the property if the borrower and the property meet the above Federal Standards provided that: the homeowner accord the government a flat percentage of the gross selling price (whenever they sell with no time limits) reflective of that "underwater" contribution by the feds and that the homeowner would then continue to service the readjusted loan and occupy that house as the primary residence.

This keeps people who can afford the "carry" in their homes, reduces foreclosures (but clearly cannot eliminate foreclosures on property where there is no economic justification to subsidize a loan with a borrower who simply cannot pay a real mortgage), helps stabilize the housing marketplace (only bad credit borrowers would be defaulting), begins to restore consumer confidence (since most our economic perception is based on our jobs and our homes), gives taxpayers a real shot of getting their money back (maybe even a profit), does not create a massive federal bureaucracy to deal with millions of homes, does not reward the institutions who built their net worth on buying derivatives by bailing them out, and takes a smaller tranche of money - only enough to cover that part home loan that is underwater (not the whole loan) - which effectively supports the rest of the loan (a huge multiplier of value).

By addressing one huge grassroots problem, the rest of the markets can find that bottom that will trigger a recovery, albeit a long slow process that could take years. We want a stock market recover that is sustainable? The Dow reacts faster than any other indicator... but let's face it, the markets need to see a s ustainable path to react to.

I’m Peter Dekom, and I approve this message.