"Paulson's plan - do it or not?"

Discussion in 'Business & Economics' started by Billy T, Sep 27, 2008.


"Paulson's plan - do it or not?"

Poll closed Oct 27, 2008.
  1. Yes, as it is now modified. Speed is most important.

    0 vote(s)
  2. No, but quickly with the mods suggested in my post.

  3. No, problem is not so bad that market can not fix.

  4. No, There is no point. USA and EU are doomed.

  1. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    I voted "No, but with mods" below. Here is why and my suggestion. (If you agree send your version of it to your Congress reps, NOW.):

    Paulson’s plan will fail because it treats only a symptom and not the cause of America’s financial illness, which is: Too many were persuaded to buy more house than they could afford by irresponsible, greedy writers of innovative new mortgage types. Everyone was operating on the “greater fool” theory and assuming the un-payable mortgage would clear later when the house was resold.
    Many of these mortgages writers knew it was a CRIMINAL Ponzi scheme, designed to collect large bonuses. Throw some in Jail and recover bonuses etc. - more below.

    A real cure must:
    (1) Restore liquidity to financial system. (Make the toxic paper worth face value.)*
    (2) Get Joe American into housing he can afford.
    (3) Transfer real assets, not toxic trash, to Uncle Sam.
    (4) Not significantly increase US’s already excessive debt.
    (5) Prevent repetition of the problem.

    This is possible as follows:
    U.S.'s money automatically buys houses at foreclosure auctions if highest bid is less than the mortgage debt, not toxic trash from banks. The banks are helped as they know the foreclosure sales will cover the mortgage so this is an anti-dote to the toxic poison they now hold. I.e. from POV of the banks, not one piece of this paper is worth less than face value. Everyone knows this so, it becomes a marketable security. If the bank needs more liquidity, they can sell it and make new loans. Goal (1) accomplished.

    The ex CEO of Goldman Sack’s plan helps GS and others holding toxic loans by transfer of them to Uncle Sam. It just sticks Joe American with the toxin but is no anti-dote for the poison.

    Here is the anti-dote:

    The government buys partial ownership of EVERY foreclosed house, if it would otherwise sell for less than the mortgage. Joe may remain in the house for up to one year with deferred interest bearing rent. During that year, Joe must find a home (house, apartment or trailer) he can afford, at least to rent. Then, when opportunity exists to recover the price paid, Uncle Sam sells his ownership share of house, which may be more than the price paid as this plan is taking houses off the market. - Keeping price of houses from falling every month as they are now, and will continue to fall under Paulson's plan, which only aids the banks, not the real-estate industry or evicted Joe. When Joe gets out from under some of his debt, he begins to pay his deferred months (<13) of rent and interest, over 5 years if need be.
    Goals (1, 2, & 3) accomplished.

    Goal 4: Instead of an immediate $700 billion increase in US’s debt ceiling, banks send bills to Uncle Sam for ONLY the DIFFERENCE between the unpaid mortgage amount and the price some buyer paid at public foreclosure auctions ONLY as they occur, if sales price was less than the mortgage still due. Uncle Sam then receives that fraction of the house’s title in exchange for paying this difference. Individual auction sales are semi-automatic with bank processing all transactions details but periodically inspected. I.e. US is a “silent partner” (minority owner or land-lord renting**) for a few years, but investors may buy the US’s share of title anytime provided US profit equals what US would have received in interest by investing in 10 year Treasury bond, as well as full repayment of the “difference funds” provided initially.

    As individual auctions are expensive, many “under water” owners may avoid foreclosure auctions and simply transfer the entire title and debt to US (FHA?) for later sale*** in collective auctions. By avoiding auction expenses, Joe hopes to get small check later, if the house sells for more than the mortgage debt. If house is re-possessed by the bank and not sold at auction, the bank may also transfer title to US and receive the unpaid mortgage due. In any case, bank receives full repayment of the mortgage due.
    Goals (1) & (4) accomplished.

    Goal 5 may require new legislation and/or adequate enforcement of existing laws; however, criminal miss-representation by greedy creators of these inventive new mortgage types should not go unpunished. Bonuses they received for writing and selling these trouble making mortgages should be return 100% with interest to their firms (golden parachutes of their now retired CEOs included). If they cannot afford to do so, some of their assets should be ceased. They also may transfer titles to US (FHA?) to avoid extra cost, criminal prosecution and probable**** jail time. It is a well accepted principle of law that criminals are not allowed to keep the loot they took. Ponzi schemes are illegal and these greedy CEOs should have known that was what they were doing. Do not let them now pass their toxic trash to the tax payers.


    *The "feet dragging" Republicans refusing to accept Paulson's plan, even with the CEO bonus caps etc., have a good point (as do I). We only need to insure that ALL mortgages will be paid in full, not buy them all. These Republicans no doubt want to give this job to private insurance compainies, but as the biggest (AIG) has already failed, that will not work.

    **If Uncle Sam receives a fraction of the title of house sold at auction, and it is rented by buyer, Uncle Sam receives that fraction of the rent and pays none of the maintenance expenses.

    *** Joe American remaining in “his house” after US (FHA?) holds the entire title via "rent to buy" instead of sale is best option, if Joe can afford it. Many who cannot pay their old mortgage will be able to, especially if they still have any equity in the house. Effectively, the US (FHA?) grants Joe a new mortgage with principle equal only to the old unpaid balance.

    “Better” socially and economically because Joe as renter will not damage “his house.” - That is hard to control. - It is very tempting (to a transitory renter) to sell the dishwasher etc. during the last month of the rental contract, if he is planning to move to another house. That renter can always claim it was broken and did not bother to tell Uncle Sam. - "I just discarded it as the repair man said it was not worth fixing." etc.

    Second reason "rent-to-buy" is better is it eliminates the sales commission the real estate agents would take and other title transfer expenses. (US got title cheaply directly from Joe without auction expenses. - No one can claim US does not own the house, even if not recorded at the local court house etc. but it should be. The county can contribute by making no charge to US for recording in land records as this plan helps hold up their assessment based taxes on the house.)

    ****Joe American is likely to be part of the jury.

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    Last edited by a moderator: Mar 10, 2011
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  3. Asguard Kiss my dark side Valued Senior Member

    as i said, i agree with you to a point. that point is that the house should be on sold to the origional owner at cost rather than sold at market costs.

    I would rather see a goverment moving to help the people rather than the fat cats
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  5. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    At what cost? (construction? original purchase price? price it last sold for, perhaps four years ago? cost of repair if destroyed by fire? what if original owner died 12 years ago?) You seem to be assuming all houses being foreclosed are new. Few are. - Please be more clear on this.

    Do you see how your suggestion can restore liquidity to the frozen financial system? I do not. If you do, please explain that also.

    Again FIVE essential things that are necessary. Paulson is only even seeing (1) of them.

    I am reminded of the old saying: “If you are a hammer, everything looks like a nail.”

    Paulson, ex CEO of Goldman Sacks, has the same tunnel vision as that hammer. He does not understand the FUNDAMENTAL problem, and with his "hammer mentality" only see one of the symptoms.

    PS to help achieve goal (5), I want to throw ALL of the "fat cats" who can be shown to know (or very reasonably should have known) they ran a Ponzi scheme to collect boig bonuses in Jail and, as with any common criminal, recover the loot they took for the rightful owners.
    Last edited by a moderator: Sep 28, 2008
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  7. Asguard Kiss my dark side Valued Senior Member

    what are you talking about?
    the cost that the goverment paid to absorb loan of course
    but over MUCH better terms.
  8. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    I still do not understand you, so lets take a numerical example

    House built in 1988, sold to origial owner, MR. "O O" for $50,000.
    He retired moved to Florida with $30,000 profit by sale to Mr B1 for $800,000 who finshed the basment, added the pool and in 2000 sold to Mr B2 for $130,000 but Mr B2 only put down $40,000 and had mortgage for $90,000.

    He had it sold in conditional contract to mr B3 in 2006 for $250,000 but Mr B2's bank exercised their option to up the interest rate on the loan so the sale fell thru.

    This put big pressure on B2 as he had already bought another house $300,000 and could not afford to carry both mortgages so he agreed with mr B3 to take "back part of the paper" (It is called a "Purchase Money Mortgage,PMM - I am still colloect on two I granted)" for $100,000. Then Mr B3 had only had to finance $120,000 with the bank as he did put $30,000 cash into the deal when buying for $250,000 = M1 of $120,000 + PMM of $100,000 + $30,000 in cash.

    Bank was smart as in 2007 Mr B3 lost his job and defaulted on both M1 nd the PMM. The bank had quickly sold M1 to Fanny May and B2 had sold the PPM to a firm that buys these second mortage for fraction of face. B2 got only $70,000 for it b ut needed the cash to buy his new $300,000 house with larger down to get lower rate.

    By chance (jut to keep it simple, but still realistic) lets assume the both M1 and PMM are in the same package now that no one will buy but M1 has been marded down form the face $120,000 value to $90,000 and PPM which had face of &70,000 to only $45,000 as is a "third party mortgage)

    What is "cost" you are speaking of for these two mortgage in the package, assuming they could be separted out and bought by the government? To actually do so would be very expensive in legal fees, title searches, recording etc.

    If you can not answer numerically, you do not know what your are talking about. - Just stating meanless words ("original owner's cost" ) in the real world of complexity.

    BTW, you were correct to ban me. - Just doing your duty /job well (as I was doing my duty as I saw it. See rest of my post partially reproduced at end of this one.) I have aleady publicly posted praise for your job well done in banning me in my reply to:
    My post at:
    Last edited by a moderator: Sep 28, 2008
  9. Asguard Kiss my dark side Valued Senior Member

    billy stop being silly, you know full well that im not talking about investment homes

    Person has a 200,000 loan on there house which forcloses, goverment bails out bank by paying 100,000 for the house

    The goverment then negotiates with the former home owner for a loan of 100,000 which the goverment paid the bank making sure they can aford it over however many years are nessary.

    THATS what im talking about, the goverment gets its money back, the bank makes sure it doesnt have the "toxic" loan on its books and the home owner still has his house
  10. one_raven God is a Chinese Whisper Valued Senior Member

  11. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    I do not think you are reading well. Everyone of the buyers in my numerical example occupied the house, NONE was investing. Your comment makes no sense as I was not speaking about "investment homes."

    That makes no sense either. The bank holding 200K mortgage is not made whole or to use your words "Bailed out"" by 100K payment. That is a "50% hair cut" or more accurately a "scalping." Your are saying that the government buys house (takes title) for $100K and making the bank eat $100K loss are you not? What sort to "bail out” is that? When government (or anyone) buys a house the old mortgage is trash - you can burn it. It obligated someone no longer with title to paid. Why should he? He has already been evicted.

    Not very clearly stated, but I will assume you mean by "former owner" the guy just evicted at the foreclosure. Are you stating that the government will try to make him sign a loan obligating him to pay 100K to the government"? If yes, then why should he?

    You seem to assuming that "Mr. Evicted," the former owner, will pay off (to the government) a $100K loan note that I cannot see why he would even sign, much less pay.

    I am not trying to be difficult.; - I just cannot make any sense of what you are posting. Perhaps someone else can and will explain it to me?

    Anyway, why not return to numerical example instead of calling me "silly" and answer the question it asked? You said the government should sell house "to the original owner at cost" and I asked: "What cost?" but you do not seem to want, or be able to, answer. Perhaps you mean sell to the last owner? Perhaps you mean sell to last owner at the price government paid at the foreclosure auction? If so - how does the bank get the mortgage money back? If the government paid the full face value of the mortgage at foreclosure, why buy the house and not the mortgage as in Paulson's plan? That would at least help with the frozen illiquid mortgages, but also like Paulson plan ignores the four other problems listed in the OP. I.e. does nothing about the fundamental problem or to prevent the whole current problem from reoccurring. How many times can the printing presses crank out 700 billion?
    Last edited by a moderator: Sep 28, 2008
  12. Asguard Kiss my dark side Valued Senior Member

    cost is the cost they bought it for, and ok maybe 50% is to low, possably its 75%, there is no way they are going to bail them out at 100%

    and this might mean that the goverment does need to take a cut to what they paid out, either way why would you think that a person wouldnt agree to buy the house back at a discount over any number of years with no interest?

    Possably this means that the goverment should stipulate that the person lives in that house for a set number of years before selling it and\or even that if the house is sold they get a percentage of any profit. thats only fair after all
  13. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    You do not seem to understand that the paper with no market -no known value - that no one will buy is rarely, if ever, any one mortgage. Even in Brazil, I still* get several offers each year for the PMMs I took back on property I sold (because the interest rates were only slightly less than bank rate of >8% buyer would have paid). There are firms, at least in the USA, with employees who spend their work day looking thru county land records for these PPM and making offers to buy from mortgage holders, hoping these original sellers need cash instead of an income stream stretching years into the future.

    That is the problem is with the "derivative" packages that have been constructed perhaps with a 1000 different mortgages in them, some worth more than face value as they are being paid by wealthy owners at well above current interest rates and other that have not been paid for many months but not yet foreclosed. No potential buyer has the slightest idea what the package is worth and now even the owner is unsure what it should be worth as there are no buyers for the package. That is problem (1) in the OP list of five problems. You are not even speaking about the real problem, perhaps because you do not understand it?

    Not sure, but here you seem to be getting close to what third footnote of the OP stated. I.e.:

    But note in my plan, the government is not taking any “cut.” Government got the 100% title to house for just the unpaid balance of the original loan which Joe could not pay any longer (lost job perhaps). Joe’s has no “new mortgage” with the FHA. Joe is renting to buy at market rent rates. If he cannot afford that, then Joe has up to one year to find place he can afford to rent (or buy trailer to live in etc.) At auction, as no one else bid high enough to fully pay off amount still due to the bank, the government did and took title. (All bank mortgages are worth 100% of unpaid balance. Effectively, will be paid in full, but immediately at foreclosure by government credit. Everyone knows this – so bank can sell them at very slight discount or even premium if interest rate is now lower than when mortgage was written. – Liquidity crisis is over immediately as every mortgage in the package is at least forth the un paid balance. I.e. Just as the Republicans want –The mortgage debts are 100% insured, but in my plan by the government, not some insurance company, like AIG that can go belly up.

    Here you are assuming that the government took some loss, but it did not. Government is almost sure to profit with my plan, but may be in the rental business, holding house off the market until the shortage of houses and return of confidence allows them to be sold back to market with gain. - I suggested same gain as if the government had bought the 10 year treasury bonds.)

    It may seem strange, but government should not try for greater gain. I.e. government should dump the houses back on the market to halt any excessive price rise. We do not want to repeat the housing bubble.

    You need to think this whole thing thru a little better, before posting. It is quite complex.

    * Ten years ago, when my PMMs had longer to run, these offers to buy my PMMs came every month.

    Must quit again this time for bed, not dinner.
    Last edited by a moderator: Sep 28, 2008
  14. Asguard Kiss my dark side Valued Senior Member

    why charge "commertial rent" at all?

    thats my point, the goverment isnt there to help companies yet they are when they should be focusing on helping people.

    A better way to do this would be to make sure that people dont forclose on there loans but i doubt any to the right would surport handing the money to the morgage holders rather than the banks.

    as a second option im suggesting that the goverment take over the house and charge as "rent" and amount which would pay it off over say 50 years and thats it. The rent goes against the value of the house (ie buying the house from the goverment).

    If the goverment has to take a loss on this then so what?

    Better that the goverment take a loss and the people remain in there house, after all. The fat cats are still going to get there multimillion $ bonus and golden handshakes. why should the goverment be taking the hit for companies and executives rather than for the working class?

    any loss the goverment incures should come out of executive saleries. put the blame where it belongs

    oh and a new income tax bracket should be introduced to cover this, from 1,000,000 up you they should be charged 90% tax. They caused the problem they will pay to have it fixed
  15. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Have not read all - on way to bed. but I am socially well left of center and yet would not support this idea. The moral hazad is just too great. For example, if that plan were in effect the smart thing to do is buy million dollar home (getting full 100% loan from the bank even if unemployed and no assets) default on it and collect the government hand out to pay bank back with. Even street bumbs can live for a few months in million dollar homes with your plan! I will read rest tomorrow.
  16. Asguard Kiss my dark side Valued Senior Member

    you do realise there are ways to insure this doesnt happen, asset tests for example. The goverment does that here all the time, for instance the first home owners grant is only for houses below 300,000 (from memory)
  17. one_raven God is a Chinese Whisper Valued Senior Member

    The limit for buy-back, in my opinion, should be the max for standard FHA single family home loan - I believe it is $419,000 (I could be wrong).
  18. one_raven God is a Chinese Whisper Valued Senior Member

  19. iceaura Valued Senior Member

    That overlooks a major part of the tproblem: the houses are bubble priced. They are not worth, and will not be worth for many years if ever, the mortgage price.

    Having the US government prop up a bubble in housing prices won't do anyone any good.
  20. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    You missed one point. Government only props up the un paid balance of the mortgages in default at forclosure, NOT the inflated bubble prices. Yes, house prices must be lower -probably need to fall more still. Please read OP again.
  21. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Yes. that swedish plan is better than the Paulson plan - more fair to the tax payers, but I think my plan is better still as it is more econcomical. Instead of buying all the toxic packages of mortgage backed securities with no market now my plan, presented in the OP, only cost the DIFFERENCE between highest bid at forecloser auctions and the remainly balance of the mortgage.* AND only on a tiny fraction of all mortgages - those that go to forclosures, but it does insure that ALL mortgage balances will be paid in full, so these packages have government insurance agains loss. Thus, the liquidity crisis is solved. - the packages are worth at least the total of the still outstanding mortgage balances.

    The plan of the OP also solves the fundamental problem (goal 2, of the five listed). In OP plan, all five problems, not just the one symptom that Paulson's plan addresses. Majour problem with Paulson's plan is it will all just happen again and there is a limimited number of times the US money presses can print 700 bilion dollars.

    *True the government does pay the entire balance due, but it gets the entire title to the properity, which just demonstarted at the forclosure to have a value equal to the highest bid. Government is assuming potentail loss of only the difference and only on the failed mortgages, not all. (Most mortgages will be paid by the owner. - No need for government to buy them.) Note that bid was with the absence of my plan and the insurance it provides. Property values will not fall as much when government is taking some off the market. I.e. the slide into the abis is at least slowed, if not stopped.
    Last edited by a moderator: Sep 28, 2008
  22. extrasense Registered Senior Member

    the thing seems to be misrepresented as bailout of Wall street. It is more likely a bailout of Federal Reserve.

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  23. madanthonywayne Morning in America Registered Senior Member

    Has anything like what you're proposing ever been done before? Would I be correct in saying you are proposing that the US government act as a Mortgage insurer? One that banks don' t have to sign up for or pay any premiums for? Would this be for all mortages, or just for those made over some specified time period? How would it be administered?

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