Monday, November 24, 2008

BUB Five

There’s chatter on the Sunday morning talk shows about help for homeowners with unwieldy mortgages and in particular a reference or two to FDIC Chairwoman Sheila Bair’s “aggressive” mortgage plan. As usual the chatter - and Bair’s plan - focus on helping people who are already in trouble with their mortgages. If you want a plan to help individuals because you feel bad for those who are losing their homes, this is fine. If you want a plan that will help stabilize the economy then this is - I’m sorry - just plain stupid.

Stop playing catch-up. We need to leap aboard the onrushing freight train and start slowing it down, not continue to go chasing after it rendering medical assistance to the people it runs over as it picks up speed. Heck, Austan Goolsbee himself was on George Stephanopoulos this morning talking about how we need to think big in getting out of the economic crisis in order to “startle the thing into submission.” So let’s not parcel out money in dribs and drabs as homeowners get into trouble; let’s clean up the whole real estate mess now.

We need a Bottom-Up Bailout (BUB) and we need it now. There are a number of differences between BUB and Bair’s plan; I believe almost all of them mean BUB is a better plan:

1) BUB cleans up all primary residence mortgages not just those already in trouble.

2) BUB reduces mortgages to no more than 25% of income not 31% as Bair proposes.

3) BUB assumes fixed-rate mortgages; Bair calls for adjustable rate mortgages. (Isn’t that part of how we got into this mess?)

4) BUB reduces principal; this helps soften the landing for the housing bubble implosion. Bair does not reduce principal; this keeps housing prices jacked up too high and will stick some mortgage holders with 40-year mortgages which I think is psychologically tough. Also I don’t see anything about what Bair will do if even extending the life of the mortgage and using adjustable rates isn’t enough to get mortgage payments down to 31% of income.

5) Under Bair’s plan the FDIC provides default protection. BUB does not but by reducing mortgage amounts to 80% of current market value lenders will be protected in the result of default by being able to sell the house for more than the amount of the mortgage.

6) Bair’s plan will “pay servicers who process mortgages $1,000 for each re-worked loan”. BUB has no such provision but it’s a good idea especially since BUB would be mandatory not optional. We just have to remember this is a fixed cost which the government has no hope of recouping under BUB - unlike the mortgage paydown itself.

Anglachel has proposed something similar and - as I say in my comment to her post - although I like my plan better I do like Anglachel’s restrictions on equity extraction once a mortgage holder has availed himself of this program and her restrictions on getting around the payback by transferring the house to the kids or turning it into revenue property.

The other thing I say in my comment’s to Anglachel’s post is (link added):

Third, if Wheelan and you and I have all managed to come up with pretty much the same straightforward plan - easy to understand, simple to implement - why the heck are the people in Washington having so much trouble figuring out something like this? This is not - if you’ll pardon the expression - rocket science.


Since I keep adding BUB posts, I updated this on December 13, 2008, to put all BUB posts in their own category. That way they can easily be found without my having to keep updating all the existing ones each time I add a new one.

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