This Time, Focus The Bailout On Main Street
There's a better way to make this sausage
As the financial and political world continues its hand-wringing in the aftermath of the failed Wall Street bailout bill, the blame game has begun, and financial institutions continue to fail. The Republicans, specifically those in the house, stood firm against a huge transfer of wealth from the taxpayers to failed bankers, as well as a virtually socialized financial system.
Defense is good, but you have to score points to win the game. It’s time to go on offense.
The average voter still has difficulty understanding the complexity of the bailout and its implications. They seem to understand that the direct benefit is a select few, while homeowners remain saddled with property that is declining in value, often with payments they can’t afford. I believe the Republicans should attack the problem from the other side, with a government guaranteed mortgage refinance program. The benefit to Wall Street should be as great or greater, but market forces, rather than a new bureaucracy, will force the fix.
Instead of buying “toxic” portfolios with dubious value, the Fed should create an RTC type entity to refinance and hold mortgages. Anyone with a mortgage currently on the books would be allowed an automatic refinance into the new fed pool of mortgages, at a rate of 5%. The loans would be subject to a limit of 105% of current appraised value. If the current mortgage amount is higher than 105% of the new appraisal, the lender would be given two choices. They could either accept 50% of the difference between 100% and payoff, which would be rolled into the first mortgage, or be forced into a subordinate position with any amount above 105%. Given the nature of the current market, and the number of lenders that are begging for “short sales”, it is presumed that most lenders would take the write down and get the note off their books.
With the low doc nature of these refis, it would seem that closing costs could be minimized to appraisal, title search, origination fee capped at .25% of the loan amount, and attorney’s fees. Closing costs would be allowed to be rolled into the loan in addition to the 105% of principal.
As an incentive to the homeowner, the loans would be assumable. This would encourage people who are at or near 100% loan to value to stick with their mortgage, knowing that when interest rates go up, (and they will), their home will have additional value because it has a 30 year fixed rate loan at 5%. This will help create equity in existing homes, while not encouraging additional new construction (oversupply) because new construction will not qualify for this program.
This would have much of the same effect as the proposed bailout. Capital would be freed up overnight on Wall Street. Homeowners would see relief across the board, not just the ones who borrowed over their ability to pay. Wall Street would be able to sort out its own winners and losers based on who has the most loan exposure to loans over 100% LTV, but wouldn’t have Congress dictating how to run their business. (After all, Congress has yet to prove they can run Congress).
The relief felt on Main street would free up additional money for consumer spending that will be sorely needed over the next 12 months with the uncertain fundamentals of the economy. The plan should stem the tide of foreclosures, which should allow real estate prices to stabilize and hopefully begin increasing again. Most importantly, the burden to the taxpayer is only in the form of mortgage guarantees, which we have acknowledged with the takeover of Freddie/Fannie already exists.
It’s not a small program, but much simpler and easier to understand than the Bush/Paulson proposal. It targets the main street middle class. And the irony of Pelosi demanding a $700 Billion wealth transfer to Wall Street while Republicans push for direct aid to Main Street is too rich of an opportunity to pass up.
So, it’s an idea. I’m throwing it out there. Clearly would need additional details to be legislation, but let’s get some conversation started.