Fixing the Foreclosure Mess
I thought of this in a dream last night. I present it for curiousity’s sake and also it can’t be worse than government current approaches! If I get economist wizard GM Ken Rogoff approval, you know the idea has wings.
Let’s take the common situation of a middle-class family whose net income has dropped sharply. Let’s say they have a mortgage (could be 100K, 200K, 300K, for example; for the terms let’s take a standard 30 year fixed mortgage to simplify the discussion) and the monthly payment is now a whopping 75% of their combined net income. They are in danger of default and foreclosure since they also need basic essentials. Government consumer guidelines recommend that one’s monthly payments be in the 28-31% range. Up until now, the government has been throwing money at banks, hoping they will loosen credit and modify loans. This makes no business sense for the banks. It also has amounted to an incredible waste of money on the part of the government. There is little sense of where the money went and what it was used for.
Drop an Anvil to Stop the Tornado
To avert the danger of the “tornado” blowing away “Dorothy’s House”, what the government should do instead of tossing bailout money blindly is “drop an anvil” by purchasing a partial passive investment on the house to reduce the monthly payment to government guidelines of 28-31% of net income. The government passive investment (can imagine charging some modest interest rate here, of course) is recouped when
a) house is sold, or
b) net income increases again, or
c) windfall income such as inheritance, or
d) (can imagine other situations here too).
This is by far the most efficient way to curtail the tidal wave of foreclosures.
I would stress this program is NOT AVAILABLE to families that live in mansions far beyond their means and needs (a common situation in Arizona where a small family has an 4,000 sq. ft. (and larger!) “McMansion>”) Those families are ineligible, need to (and should!) sell at a loss and move into a much smaller home and “get real.”
In the respect my idea is superior to Time.Com’s Ari J. Officer when he proposes a brute-force reduction of EVERYONE’S mortgage principal to 70% of its original value. I don’t buy that. I don’t want a giveaway, for one, and I don’t want to reward irrational mansion dwellers. The government’s stake in my proposal remains the government’s.
The beauty of this solution is that it’s highly quantifiable and as an investment strategy, we have clear balance sheet measures. It’s not a blind shoveling of money at a problem. What say you, the reader?
Where the Government Seems to be Heading
As of Friday the 13th (!) the new “plan” seems to be to subsidize the payments of those in trouble. Bad idea, because it’s a bad investment! The passive investment stake outlined above gives the government a far more concrete and measurable course of action. Subsidies are just money down the drain (as with the early bank bailouts of the Bush administration).
It’s pretty clear the average consumer has no inkling of the risks involved in ARM (adjustable rate) mortgages. The government could consider a mandatory conversion of all ARMs to fixed-rate and impose strong regulations on this single type of mortgage.
And for Something Unrelated
Does anyone know what this image is? And where it is?
The “Lubber” (Sculpture Work)
And where is this Prive salon ad? This is one of those intense Elizabeth Vicary style model ads.
I saw some similiarity to the intense expression in the next picture (maybe it’s just me).
So, does anyone know where Lubber resides?