DUH!

“Government likely has a role to play in supporting mortgage securitization, at least during periods of high financial stress,” said Federal Reserve Chairman Bernanke on Friday to a symposium on the mortgage crisis and the economy at the University of California, Berkeley. Glad you noticed, Ben. Think Henry shares your feeling? Ben even mentioned some possible directions, like federal insurance for bonds used to back mortgages. Keep thinking, Ben, ‘cause I’m sure that, in time, you and that Treasury guy might figure all this out. Glad this little issue finally crossed your radar screen; kind of thought you might have missed it.

The folks at JP Morgan Chase seem to have got the picture… even as the feds just muse about the alternatives. They actually heard the cries of angry consumers, more than you can say for our elected and appointed representatives. According to an Associated Press report on Friday: “JP Morgan 's expanded program aims to help avoid foreclosures on an estimated $70 billion in loans, which could help as many as 400,000 customers. The New York-based banking giant has already modified about $40 billion in mortgages, helping 250,000 customers since early 2007… JPMorgan will not put any loans into foreclosure as it implements the expanded program over the next 90 days.”

What’s so stunning is that this restructuring comes from a big boy financial institution, operating in a period of falling values, consumer prices and increasing joblessness – a period of possible prolonged “deflation” where positive growth of any kind becomes difficult – without the possibility of “syndicating” loan packages (sharing the risk) with other banks, because banks don’t trust each other enough to lend to each other. I’ve trashed a few financial institutions in the past, but this time, I’ve got to give some serious kudos to the men and women of JP Morgan Chase. That took guts.

Some people who aren’t homeowners are wondering why this matters to them; they are angry that some folks might get federal help while others do not. Maybe it’s easier to think of this mortgage crisis as a tornado that touched down and took out a bunch of your neighbors’ homes – looking like a random assault from an aerial map. If your neighbors’ homes remain unfixed, even if you are a renter, you won’t like living in that neighborhood very long. Values will crash, and the very character of the neighborhood will change for the worse. And let’s face it, some of those neighbors’ homes may just have to be cleared for new parkland… not everybody deserves to be bailed out (not to mention that there should be a way for the taxpayers to get paid back too).

The shame of all this is that a big old bank has come up with answers, when our government can’t seem to get out of its own way to begin the fix. JP Morgan’s already implementing a solution while the government’s still playing with “possibles.” Please send the moving trucks to Washington at little earlier than January… I’ve got this list of people in D.C. that need to be moved out right now!

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

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.

Writing a Paper on What Should have Been Done to Fix the Great Depression

Federal Reserve Chairman Ben Bernanke has spent his life studying banking and economic cycles. From his days as a graduate student at the Massachusetts Institute of Technology to his 2004 book, Essays on the Great Depression, he has drilled down on managing economies in a crisis. Two days ago, he agreed to buy up short term commercial paper (discussed in my last blog) to ease the credit freeze, and this morning, he presided over an emergency cut of a half point in the rate that the Fed charges banks. How did the markets respond? The NYSE dropped 5% after the first decision, and the markets remained down after the second. He’s clearly not reading my blog… or that of anyone else who has made these suggestions.

Who am I to tell the Fed Chairman that despite his best intentions, the failure of both the Department of the Treasury and the Congress to reach down to the grassroots of America and address the first line of attack – helping human beings with homes (even renters… nothing like renting from a homeowner who is being foreclosed!) who need to know they are not losing their homes – is only making things worse? I somehow feel morally obligated to try. We do not need more houses dumped into a market that cannot sell what’s there now – because no one has money to buy houses and there are almost no loans to support even these low values. The real estate market does not need to be further depressed. Home value is how most folks look at their net worth.

And we need cash at level where small businesses can meet their payrolls. I’m sounding like I am beating a dead horse, but no one seems to be addressing the obvious! When businesses cannot borrow money against stuff that their customers already bought and are paying for, when then cannot meet payroll because of this huge factor, someone has to step in before all the people who need to get paid are laid off instead. Fund that market now!

This mess hurts horribly. We need to stem the tide and address the human beings in the middle and at the bottom who can’t afford lobbyists, who cannot wait for a trickle down from the lending institutions that are getting “bailed out.” According to Peter R. Orszag, director of the Congressional Budget Office, addressing a House subcommittee, our pension plans have loss over $2 trillion in the past 15 months! People cannot retire, and the young folks waiting for new jobs are seeing fewer vacancies, beyond those caused by the meltdown, because fewer people are leaving their jobs for retirement.

It almost seems as if those in Congress, from both sides of the aisle, and the Executive Branch are intentionally leaving a mess that cannot easily be rectified for years to the next President and the next Congress. In the end, where everyman stares blindly at those with “golden parachutes” wondering why that can even happen, perhaps our elected representatives can help us with a lousy old mattress to land on in a world where they seem to have shoved us out a plane door.

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