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The financial fix
Dave Ramsey, the widely known Christian radio host and financial writer, has put out his own rescue plan for the financial crisis. He writes:
Years of bad decisions and stupid mistakes have created an economic nightmare in this country, but $700 billion in new debt is not the answer. As a tax-paying American citizen, I will not support any congressperson who votes to implement such a policy.
His “Common Sense Fix,” which “costs the taxpayers nothing,” would include the government cutting the capital gains tax and the removal of mark to market accounting rules on subprime loans, allowing banks to sell bonds not based on the current fire-sale market value of their mortgages.
He also suggests more government-backed loans, which sounds sort of like … the bailout of bad loans everyone in Congress is talking about. But he is only proposing the government spend $50 billion.
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…the removal of mark to market accounting rules on subprime loans, allowing banks to sell bonds not based on the current fire-sale market value of their mortgages.
In other words, lying about the current value of their “assets”. Pretending that the real estate crash hasn’t happened, and that the balloon is still getting bigger and bigger and bigger…
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My understanding is that he proposes the gov’t back the loans with insurance, rather than outright purchases of all the property, as I understand the bailout to do. Did I get that wrong?
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Actually if you read the actual link to Ramsey’s Fix, Arcadia, it only temporarily suspends mark to market on only Tier III bonds/mortgages. It doesnt do away with the debt they owe, it suspends it.
Kinda like a long grace period for them to get their act together. Further it costs the taxpayer nothing.
His other 2 points stress a reasonable resolution to those faced with foreclosures, and he calls for repealing the capitol gains tax.
The balloon will get bigger and bigger if you only drop 700 billion of monopoly money to cover the bailouts. It wont provide the liquidity they claim it will.
Of course the problem with Ramsey’s plan is that it requires us to stop pointing fingers, stop bickering on the politics, and actually do something reasonable to help everyone affected.
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I think he makes a lot of sense. He should be in gov’t! At least he would get that budget balanced and get us out of debt. That’s what he does, and he does it well. Hooray for common sense! I’ve emailed my Senators – have you?
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I see George Soros is floating a solution also.
I wouldn’t support that if you put a gun to my head…
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Soros Bailout Plan
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Thorn: Actually if you read the actual link to Ramsey’s Fix, Arcadia, it only temporarily suspends mark to market on only Tier III bonds/mortgages.
Here is a post that I posted elsewhere a while ago. I have tinkered with the wording a bit and posed a different question at the end, but you’ll get the idea.
Late yesterday I got a fax of a HUD-1 settlement statement for a property that is three years old. It is gorgeous. The owner, a fairly prosperous tech wiz, paid just about $550,000 for it. At the time, it was a bit pricey, but still near market value as he and his wife had really customized a good solid model in the nicest subdivision in the county.
The first mortgage, through a Wells Fargo broker, who pocketed about 5K was $420,000.
About 6 months later, he took out a second through Chase for $75,000.
Three months later, he lost his job and after a few months of unemployment he had to move one state over. That job ended and he and his wife and kids moved to Europe to live with family.
The house has been on the market as a short sale, with a tenant who meticulously maintained it, for a year and a half, starting at a price $525000 and proceeding ever downward to where it now sits at an official asking price of $390,000. Wells Fargo completely ignored and did not even respond to several offers in the 400’s along the way.
The closing price on the offer they just accepted ten days ago is barely north of $300,000. Wells Fargo will get about $275,000 of its $420,000. Chase will get $1,000 of its $75,000.
Yet you are telling me that it is okay for Wells Fargo and Chase/JPMorgan to carry these assets and tens of thousands like them on their books at their original value? That they need a long enough “grace period” for the real value of this property to go up by 50%??? And that in the meantime the market is supposed to rely on their balance sheets???
That is NUTS.
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Works for me! Larry Burkett now has a worthy successor.
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Arcadia, this is a genuine question–what is the original owner’s responsibility in this? He would have lost his downpayment–but did he have one?
In California, any time you take out a second mortgage,refinance, or get an equity loan, you’ve signed surety and are on the hook for the entire amount of money loaned. That’s been a concern of ours for some time as we’ve watched people in our community buy increasingly expensive homes (mean price for a home in our county three years ago: $635K; mean price last week: $340K. Obviously someone has lost a lot of money, but who?).
My feeling is the responsibility lies with both the owner and the bank/mortgage broker who made out the loan. Isn’t that who should feel the effects of the loss? Or am I misunderstanding something?
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Obviously someone has lost a lot of money, but who?
I’m no whiz with this stuff, but it seems to me that nobody’s lost a dime unless they try to sell.
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I see Jim Moran will be involved in the Soros Bailout Plan.
Hold onto your wallets. Jim Moran is one of the worst in Congress. The people of Alexandria keep him in Congress because he is a crook that delivers for them.
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American thinker has a delineation of what went wrong.
Seems Barney Frank was in the thick of it, obstructing What Really Needed Doing.
I have yet to see a rebuttal to it that makes sense. Perhaps our liberal contingent could see fit to open our eyes for us in a non-Ad Hominem fashion?
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Arcadia,
You still didnt read Ramsey’s Fix link did you?
Your story fails. The issue isnt standard risk on the consumer or lenders part. Both have risk and responbilities. If a consumer fails to pay the lender loses on his investment. If the consumer pays, the lender wins on his investment.
The problem is, and this is not disputed on either side, is that these failing companies took high risk in lending out to bad investments, the consumer. Most of these were the subprimes. Consumers are responsible for signing these ARMs, the lender is responsible for his risk as well. Companies, lied on their balance sheets for years, and now here we are.
Ramsey, isnt attempting to pass the buck. A 700 billion bailout is. Its simply buying off the debt, and with monopoly money. That solves nothing and is quite NUTS. It liquidates, but with fake money and fake balance sheets once again.
So Ramsey offers 3 steps. Go read them. They all have to be put in place to work. (Its only 1 page.)
btw, I didnt say “long enough” grace period, i said “kinda like a long grace period” Long was my relative measure for Ramsey’s two years. The point in which is not to ignore the debt or fake the balance sheets. The point is to allow time for failing consumers and companies to stabilize, regroup, and pay off the debts they owe. The market can easily rely on that, especially if its liquid and not crunched.
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Not marking to market is what caused Japan to live in a state of denial about its solvency problems for four years and then malinger another six years for having made matters worse. Not marking to market doesn’t restore the $4 trillion in lost real estate wealth, or forestall the $3 trillion in losses that are still to come. Does Ramsey think that financial instutions will be satisfied with each other’s balance sheets and not read the 10K reports to understand what underlies their assets?
Who’s going to pay for default insurance, and how much will it cost?
What will the government get for its $50 billion? Any player putting that kind of money into the market needs to have an equity stick.
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Torn,
well I did read his fix.
Quite simply this will not work if my understanding of fundamental the problem is correct. The following lecture I suggest is critical here:
http://es.youtube.com/watch?v=Wj_JNwNbETA
We have several problems and this lecture explores many of them in depth.
The first of course is a problem of frozen liquidity. This proposal can not generate the perhaps $1T of additional liquidity required and the republican Study Committee which presented a version of this plan admitted that it can not.
Second: while the relaxing of the mark to market makes the balance sheets artificially look better, it does not address the imbalance of the balance sheets AND because of the mix, some of these securities will have to be sold AND then the relaxation of the mark to market is moot. We literally need to take these securities off the market and place them in a position where they can be held until the mortgages mature or are otherwise retired.
Do note that the present Economic Stabilization bill explciitly allows the Secretary of the Treasurer to relax mark to market.
And it is not clear how we would even price the insurance. The toxic mortgages are homogenized with presumably good motrgages and it is not clear how to untangle them. Even here, however, the bill explicitly authorizes ther use of insurance should this be appropriate.
Look at the video, consider the maturity mismatch problem, the high leverage problem, and the very weak balance sheet problem and then explain to me how any plan which does not sequester these toxic securities from the balance sheets of the financial sector and the market is going to succeed in repriming the credit pumps.
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But lets consider.
The consensus argument is that these toxic securities will impact the financial sector. This seems well established, and solutions are presently focused on unclogging these securities.
The second and perhaps more important question is whether these financial sector woes will impact the greater credit market. Indeed those who have been arguing most vociferously against the bill are also implicitly asserting that this impact will not occur. If you believed it would occur, then the carnage which this would cause would drive one to take desparate measures to fix the problem, and insatead these forces appear to have been relatively satisfied that no action is occurring (or are suggesting solutions which clearly will not work).
The recent problems with state bond issuance in Missouri, Maine, and Massachusetts suggest that this problem is not hypothetical: it is happening already.
And once we have established this, it then is encumbant on us to take action that can impact the primary problem.
We will see tonight whether the Senate will demonstrate their leadership on this issue.
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Now there is a fundamental problem which is addressed in Ramsey’s proposal: the faulty mortgages.
We can debate forever who is at fault, and in large measure it no longer matters. I do suggest that those who are most sophisticated in a transaction should be held to the higher standard, but this is a topic which is challengable.
What is more difficult is that, as I understand it, since the mortgages have been spread among a number of investors, all the investors must agree on any change in terms of the mortgage: it does not appear that Ramsey’s proposal considers this difficulty.
Resolving the mortgage problem is hard and complex. My sense is that it is too complex to include in this bill.
We will, however, have to deal with this problem eventually.
I suspect that the path forward here will be to work with the homeowner directly to refinance the mortgage, since it is my sense that all mortgages have some options for pre-payment (or the house effectively could not be sold) and this could finesse the multiple investor problem.
In any event, this is complex and should perhaps most properly be kept for a second effort which can evaluate this situation more slowly and judiciously.
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The following program is already in place:
Hope for Homeowners program
which provides government assistance with refinancing. It sounds like a portion of Ramsey’s proposal is again already covered.
And we are seeing that much of the Ramsey proposal is already in place, but is insufficient.
And we will probably see the present stabilization bill go through tomorrow.
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Thorn: Sorry I was out all day yesterday and didn’t get a chance to follow up. Musing has already covered most of the problems, in a much more elegant fashion than I. Your guys plan certainly does call for continuing to hold the bad mortgage debts and the witches brew of CDO’s based of them on the balance sheets at ridiculously high values. And, if you read the numbers on the transaction I described, you will see that there is simply no way that the first mortgage will be above water for at least 4 years and the second—well maybe a decade might do it.
And your assertion that this bailout money is “monopoly money” is just plain wrong. It’s real, in a couple of days the Secretary of the Treasury is going to have his hands on it and once he spends it, he’s coming to us with the bill.
Michelle: The homeowner did originally have a 130,000 down payment. He later borrowed the $65K, so he has lost, forever, $65K and what little accumulated equity he had in his home. Ouch!
Nobody is bailing him out. Nobody, except some Dems is saying, “well, lets just let him slide for a few years and see what happens”, which is exactly what we are doing, under either scheme for the lenders. He is toast, and, of course will pay his share in taxes for the bailout. If he ever comes back to this country.
Interestingly, in this case, I am not sure if Wells is actually releasing the mortgage note. It could be that they will chase him down, attach his wages or his car or whatever they can find in order to get the entire note paid. I know Chase released, not sure about Wells.
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“Now there is a fundamental problem which is addressed in Ramsey’s proposal: the faulty mortgages.”
Yup, good job. 1 point for you.
“We can debate forever who is at fault, and in large measure it no longer matters”
I’d give you 1 point for this, but in another thread, your still attackign Republicans…so you get 1/3rd of a point.
“What is more difficult is that, as I understand it, since the mortgages have been spread among a number of investors, all the investors must agree on any change in terms of the mortgage: it does not appear that Ramsey’s proposal considers this difficulty.”
0 points awarded. Ramsey addresses this, as the HfH fails to attract the investors/lenders etc. The link you gave states so in the article, that many wont, except maybe a last option because the lender is going to lose out most likely. Ramsey mentions that the FHA is currently doing part of his proposal, the problem is, is that HfH isnt enough to encourage the lenders to hop on.
“We will, however, have to deal with this problem eventually.”
0 points awarded, you need to deal with this now.
“In any event, this is complex and should perhaps most properly be kept for a second effort which can evaluate this situation more slowly and judiciously.”
0 points awarded. The bailout, fails to address the fundamental issue here. Its like if your bleeding uncontrollably (like our market), dumping more blood in (money), might keep us alive, but it fails to address fundamental issue of how to STOP the bleeding.
You have to stop the bleeding or else your just wasting blood, and at some point, pumping more blood in wont be enough, as the bleeding has been escalating.
Dumping money to buy the bad debt off, fails, because foreclosures, and bad debt are going to continue to occur. How do you solve that issue? You do what ramsey does and address the fundamental. You STOP the bleeding. If companies want to be insured for their loans, they have to bring all borrows in these subprime fiascos up to date, giving them the opportunity to still pay back the lender and at no loss to the lender. Thus foreclosures drop dramatically, lenders are paying off their own debt, and the market begins to stabalize.
HfH is kinda like a small band aid, but it just doesnt do enough to help every ailing borrower, or insure the lender and thus it doesnt bring the stability we need right now. It would be easy to amend.
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“Your guys plan certainly does call for continuing to hold the bad mortgage debts and the witches brew of CDO’s based of them on the balance sheets at ridiculously high values.”
Hold, so they can still pay it off. That takes time, it took time to dump us into this crash, it will take time to recover from it. The point is, the government isnt bailing out the bad mortgage, and your attempting to stop the bleeding at the same time.
What is wrong with failing companies being able to pay off their own debt as well as the borrower?
“And, if you read the numbers on the transaction I described, you will see that there is simply no way that the first mortgage will be above water for at least 4 years and the second—well maybe a decade might do it.”
The blame still lies wiht both the lender and the borrower. Please explain why, I, or You, as the taxpayer should bail them out?
Regardless of the time it takes, if you wish to have the borrower repay the loan he owes, then it would be helpful to restructure the loan in a way that gives him that ability (not foreclosing), while still allowing the lender to recoup what he loaned. Thats what the FHA with its HfH is attempting, but its just not enough incentive.
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“And your assertion that this bailout money is “monopoly money” is just plain wrong. It’s real, in a couple of days the Secretary of the Treasury is going to have his hands on it and once he spends it, he’s coming to us with the bill.”
My bad, its made out of cotton, straight from the printing press. Going to flood the market full of cotton. Your right, its so worth something, kinda like those brown paper towels at the gas station bathroom that have no absorbtion whatsoever, just kinda smears the water around.
But your right, you and I are footing the bill. So call your congressman and tell them to vote no.
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