I am Not a Communist – Part 2

As I previously noted, I believe that there is an important role for government in helping to clean up the credit crisis and restore order to the mortgage market. For those who complain about government intervention, may I remind you that most likely you get the biggest tax deductions most people qualify for:those for mortgage interest and property taxes. So if you want to deny someone else's benefits, you should be willing to give up yours. Not ready to do that? I thought so.

Borrowers who acted stupidly, who are in over their heads, will have to suffer the consequences. But there are some very decent citizens who do deserve to be helped.

The big problem area in this whole foreclosure mess is with the folks who find that their home is worth less than the loan balance. Their credit is OK. Perhaps it wasn't when they bought – which was why they got a subprime loan - but let's assume that they have cleaned up their credit.

They have adequate income and they can prove it with paycheck stubs and the like. The final important ingredients are that it is their primary residence and they intend to stay in the home for a long period of time. In a normal market they would now be able to refinance out of their toxic loans into normal loans at a reasonable rate with payments that they can afford. But no one is doing 110% LTV loans.

My own plan, which exactly no one offered in Congress, would be to have their current lender offer them a loan equal to their current loan even if it was greater than the value of the home. It would be at a market rate for A-paper loans, say 6%. The current lender does not take a hit and he ends up with a loan that is less likely to end up in foreclosure. 

The borrower gets a loan that is no larger or smaller than his current loan – i.e.- he is not being bailed out either - except that the new loan is not toxic. It is affordable. Yes, his home ultimately has to appreciate back above his loan balance before he gets any equity, but time will cure that.

The plan bouncing around Congress is different. And it includes help for this type of borrower. They would be offered a new loan at 85% of the current appraised value of the home. Does that mean they have instant equity? I guess so. The current lender, assuming it goes along with it, will be offered a payoff of 80% of the appraised value. That may be only 60% or 70% of the initial loan but more than the lender might get in a foreclosure. We'll see how that Bill proceeds.

The other thing I am in favor of is a tax credit for home purchase. The current plan includes such a credit for people buying a home out of foreclosure, but I think we need to do more. The fastest way out of this problem will be to increase the rate of sales. That will slow or eliminate the price decline and it will certainly slow the foreclosure rate.

In conclusion, I believe that an important function of the government is to maintain the public confidence in our markets and in our economy. That was what the Bear Stearns action was all about. Restoring a sense of trust to investments such as mortgage backed securities will be important in how our financial markets and our currency are perceived.

Remember that in the earliest days of our Country, one of the Federal government's first actions was to assume the debt obligations that had been incurred by the 13 States during the Revolutionary War. It became our National debt. That was an important step in creating world confidence in our new nation's creditworthiness. Government should play a similar role now.