My solution to the Bailout (taxpayer investment)

[Bree22]

I know there was a thread of this already,but i felt it was better for me to restart a different discussion.

 

 

Bailout - Investment - Paulson plan.

RE: Economic Bliss for the Middle Class

 

It is my concession that there is a very simple solution to this entire mortgage quandary. The goal should be to use the $700 billion to create a market for all this under performing paper. From listening into CNBC, it is my belief that it is going to cost the gov’t 7% to borrow the 700 billion. So the gov’t should offer to buy the paper from the banks at 40% on the dollar with no strings attached. This achieves several things. First, it creates a market for some other company, investor etc., to initiate an offer of more money to buy this same paper. Because you have now created a bottom for every one to price off of. Second, is that this eliminates bad paper (un-valuable assets) from of the banks books, thus allowing them not to have to carry the large cash reserves. Additionally, it frees up their funds to lend again. They can start regenerating capital vs. watching their balance sheets disintegrate. Third, this allows the gov’t to stop foreclosures (or the very least to slow it down) and reduce the supply of homes on the market. This should stop the falling home prices by reducing the inventory levels and allowing the banks to approve more qualified borrowers. This is basic supply and demand economics. Fourth, the Financial Institutions are not being “let off the hook”, because now they have to take (or can finally realize) the loss for these loans on their books, stabilize their stock prices and balance sheets. Rest assured, they all made enough money from 2002 to 2006 to cover (absorb) loses and then some.

 

Simple math says that the gov’t borrows at 7%, $700 Billion, which brings a carrying cost of $49 billion in interest per year. Now the gov’t turns around and offers the homeowners a workout program similar to this. We have a tiered interest rate system. Interest rates are based on the length a homeowner is locked into that home. Call it a prepay, if you want. Now you rework the borrower’s rate for an example, 7% fixed you are locked into the home for 3 years (meaning you can’t sell without a penalty). 5% you are locked in for 5 years, 3% you are locked in for 7 years. Now I am going to make 3 assumptions: 1st is a 1/3 of all loans fall into all 3 slots. The 2nd is all the loans ended up in the 3% option and the 3rd is all loans end up in 7% option.

 

The main objective is that the homeowner is not going to get a reduced principle amount. So the homeowner is subject to paying their selected interest rate against 100K while the gov’t only paid 40K for their Mortgage Note.

 

1st) $700 billion equates to $1.750 trillion in Mortgage Notes. So you have $583 billion at 7% producing $40.8 billion in interest; $584 billion at 5% producing $29.2 billion and $583 billion at 3% producing $17.5 billion in interest. So we have a potential of $87.5 billion in interest collected. If we use the current default rate of 5% we should be able to recognize 95% of the $87.5 billion as income which is $83.1 billion gross. Minus the interest that the Gov’t. pays of $49 billion and you end up with a net profit of $34 billion to pay down the national debt.

 

2) $1.750 trillion at 3% produces $52.5 billion in interest. Take the same default rate 5%. You end up with $49.9 billion in interest minus the $49 billion in cost the Gov’t ends up with $900 million in net profit to pay down the national debt.

 

3) $1.750 trillion at 7% produces $122.5 billion in interest. Same default rate 5%. You end up with $116.3 billion in net profit minus your cost $49 billion nets you a profit of $67.3 billion to pay down the national debt.

 

Simple stated, we are paying down the national debt without increasing anyone’s taxes and additionally stabilizing Wall St. and Main St.

 

Now the reason for the lock in (prepay) period, is to guarantee (protect) some things. 1st , that home should stay off the market for 3 to 7 years so you are relieving the back log (inventory) of real estate for sale. 2nd, you are maintaining homeownership in all neighborhoods, stabilizing all communities that are affected by this (mainly FL, NV and CA), eliminating or minimizing vacant (abandon) homes. 3rd, you are protecting the gov’ts investment.

 

The penalty would work like this. If the homeowner sells before their lock in then the gov’t receives all profits from the sale (their will be NO SHORT SALES allowed) and the homeowner only receives the principle that they have paid to date from the sale. If they default (missing 3 consecutive payments), there is an immediate foreclosure and the Gov’t is the sole owner and has the ability to resell the home to a qualified homeowner (buyer). Traditionally, a foreclosure gets 70-80% of the current market value, so the gov’t should generate a 50-100% return on their initial investment.

 

Now my plan has a max life of 7-30 years, which is just ridiculous. So the object is to get this off the gov’ts books and back into the open (free) market. Once the market is stable and these loans are performing again the gov’t can sell them back to the market for a premium. Eg:

 

1. Assuming the same assumption: loan 100K with a cost of 40K at 3%. So the gov’ts real effective rate on this loan is 12.33%. If the gov’t sells this loan for a 50% profit (60K) to the market, the buyer is going to realize an effective rate of return at 7.55 % and at 100% mark up (80K) the effective rate is 4.84% (highly unlikely). So let’s assume after 2 years you can sell the 3% notes at 50% markup. So assume all $700 billion was used in this option; $700 billion at 50% markup is a return of $1.05 trillion with the interest for the last 2 years covered at least no cost to the gov’t or American taxpayer. So in 2 years we were able to pay $900 million a year against the national debt and then a lump sum payment of $350 billion at the end of year 2. This should be the worse case scenario.

2. The Best case scenario is 100K loan with a cost of 40K at 7%. So the real effective rate on this loan is 19.91%. If the gov’t sells this loan to the market after 2 years at 50% profit (60K), the buyer is going to realize an effective rate of return at 13.03% and at 100% markup (80k) the real effective rate for them is 9.37%. This program allows a good chance to make a 100% markup ($700 billion profit plus 2 years of interest payments of $122.5 billion per year) and making some real money to pay down the national debt.

3. Personally, I think you would end up some where in between. So the 5% program would state: 100K loan with a cost of 40K at 5%. So the real effective rate of return is 15.97%. So at a 50% markup (60K) has an effective interest of 10.23% and a 100% markup (80k) effective rate at 7.09%. Assume the same 2 years with a 50% markup sale you net $350 billion plus $34 billion per year to pay down the national debt.

 

Now this plan is really only addressing primary homeowners and really doesn’t solve the whole problem. So what to do with all those investors that over bought (over extended themselves)? I would offer them the same bailout with some changes. Increase the rates by 2% or give the same rates but after the lock in period is over, the gov’t (or new note holder) is 50% owner for the remainder (life/sale). This is a fair price to pay for speculation.

 

Qualification for these programs should only be based on what the government buys from these banks. They should not be subjected to underwriting guidelines (income verification, asset verification etc.). Let the borrower choose and make it their responsibility to pay. Everyone should and must be held accountable for their actions.

 

This might not seem fair for those who are paying there mortgages on time, but they have to realize that if something is not done they also will be paying for a house that is not worth what they are paying for. The benefits of this program are market stabilization and freedom to sell their home any time they want without any preconditions.

 

I do not think that the government should ask for ownership in these financial intuitions because, we are not a socialistic society (country). But, I also don’t think these intuitions should be let off the hook either. I like the talk about the stock holders being asked to vote on what compensation should be for top level executives, as they do ultimately work for them (stockholders). This plan should satisfy both parties by maintaining the free market (republicans and conservatives) and by protecting all home ownership (democrats and liberals). Also, I hope you do not outlaw “subprime” and “Alt A” because, there is an innate need for these products in the home market.

[muck]

I believe there is a better way to determine the price of the mortgage assets acquired from banks than to pay a blanket 40% of face value / par.

 

For example, the gov't issues a RFP from ANY lender to sell their mortgage to the gov't as follows:

 

...auction #1...

The US Government will be spending up to $10 million to buy fixed rate 30yr term first mortgages originated in July 2007 in zip code 12345 with an original LTV of 90-95% which are currently delinquent 60-90 but not in foreclosure.

 

...then any lender that has a first mortgage that meets this criteria submits a bid to the US Government at which price they'll sell that mortgage... The USG starts with the lowest price and works up the list until either they've purchased all the loans or spent $10 million.

 

...auction #2...

The US Government will be spending up to $10 million to buy variable rate 30yr term first mortgages originated from January to March 2006 in zip code 98765 with an original LTV of 80% or less which are currently in foreclosure.

 

...then any lender that has a first mortgage that meets this criteria submits a bid to the US Government at which price they'll sell that mortgage... The USG starts with the lowest price and works up the list until either they've purchased all the loans or spent $10 million.

 

Rinse. Repeat.

 

This allows the USG to target the zip codes in the most dire circumstances and/or to pay the lowest prices possible for each specific type of asset.