"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

    {1} I do not know of it, if it has.
    {2 & 3} Yes. That is actually a nearly correct summary of my plan. But as you observe there is no insurance contract or fee.
    {4} Not all. For example, I hold still two purchase money mortgages, I granted to the buyer of some property I sold. They should not be covered. In Maryland the new owner's title is a conditional one in that if the mortgage is not paid the property returns to me, but I am sure there would be some court actions required to confirm it was not paid. New owner can only sell it after my mortgage balance has been paid; to get the required "clear title" the new owner needs to get a signed mortgage release from me. (I have wondered what happens if I die on them, but sure there is some procedure already for this.)

    I have not thought much about how to distinguish which mortgages are insured vs which are not. My first stab at that would be to say only those issued by some government regulated grantor (banks certainly are) would be or use whatever criteria Fanny and Freddy used (I do them the honor of assuming they had one :shrug

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    to accept mortgages. Perhaps it could even be "at the discretion" of the FHA.

    {5} I have already suggested that it is semi-automatic with bank (or current holder of the mortgage) taking* the overdue borrower to foreclosure auction and seeing if any buyer's bid will cover the unpaid balance (and cost of auction). If there is than government does not buy. I for example, the highest bid falls $13,000 less than needed, the bank send claim for that amount to FHA, with suitable statement from the auction officials confirming what was the highest bid and the title signed over to FHA etc. The only new administrative expense to the government is some spot checking of these semi-automatic procedures by the regular inspectors enforcing the existing regulations. There will be expenses associated with renting and keeping the home repaired etc, but presumably these are covered by the rent. Note that I recommend that the almost evicted person be given one year to find housing he can afford.

    As already stated, he gets to defer rent with interest, for repayment later up to five years. Here are some new details on this: If he acts quickly and finds new place to live in first month 90% of the rent is cancelled /forgiven. If in the second month, 80% is, etc. If stays in his old home for part of the 11th month the rent for all eleven months is 1.1 times fair market rate, but still fully deferred. This encourages him not to stay the full 12 months, but quickly get into housing he can afford. - That he was persuaded to buy more than he could by greedy irresponsible mortgage writers wanting to collect big bonuses is the CAUSE of the problem. Joe American needs to move to housing he can afford.

    At least 3/4 of these subprime mortgage writers KNEW he could not afford the house. They and Joe may have honestly believed that a greater fool would come along and Joe would sell at a profit. None the less, more than half should have known this was doomed to fail and was just an illegal Ponzi scheme designed to collect big commissions. I want them prosecuted and sent to jail like the criminals they are, but in the process we confiscate their bonuses and golden parachutes. - Criminals are never allowed to keep the loot they took, even if it was taken non-violently and from a willing but misinformed victim. CEO now stands for Con Every One. That is what these criminals were - very polished con-men.

    BTW my idea is not far from what the Republicans want - Insure mortgages to make them all be fully paid but I only do it for those that are otherwise failing and by the existing government agencies, not a firm taking profits out of the pot. I would not object to hiring with competitive bids private firms to manage the rentals, of housing that becomes owned by the government -that is cheaper and better. Say these firms get to keep 5% of the rent plus up to 3% over well documented and required maintenance costs for administration of them (fix furnace etc) but unusual maintenance expenses almost guarantee a detailed inspection by IRS agents.


    * There was some clever Ponzi scheme in some Eastern European country shortly after they started switching to a capitalistic system but I forget the details. Many lost their entire savings. The distinguishing characteristic of all Ponzi schemes is that every larger amounts of money come into the system and give profits to those getting out before the collapse comes. There are two basic variants, the "chain letter" type has each participant pay the same fixed amount and needs for the number of participant to constantly increase. The other type, which this housing bubble was, has the cost to each participant increase until the relatively fixed number of participants cannot pay the higher prices. The unethical greedy criminal writers of theses PONZI mortgages delayed the collapse and made it much more damaging. They should go to jail and their profits be taken from them.
    Last edited by a moderator: Sep 29, 2008
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  3. iceaura Valued Senior Member

    That's the same thing, essentially.

    It is less economical, in that the government takes a dead loss and the "investors" in the bubble debt are repaid, and in that the expenses of legal foreclosure are still incurred by everyone.

    In the Swedish plan the government bought equity at negotiated market price, not bubble price, and took an equity gain from the resulting stability of the market while sticking the bubble enablers with loss.
    Last number I recall, 60% of the trouble debt was refinancing.

    Regardless of the obvious ethical deficit, after deregulation much of this stuff was legal - that was an underreported aspect of the S&L crisis as well: the problem was not the illegal stuff, but the deregulated setup that permitted abuses. There is no legal recourse for that, and your plan would provide price support for the bubble priced houses, thereby guaranteeing big payoffs to the unethical.
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  5. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    We disagree on everything here, basically because you are of the opinion that government stepping in to take FULL title to a home, when owner can no longer pay its mortgage, for ONLY the investment cost of the DIFFERENCE between un-paid balance and the highest bid price (which is a CURRENTLY DEPRESSED MARKET PRICE) is support of the higher "bubble price." - That is not true, NOT what I have suggested.
    Specifically on:

    (1) Not the same at all. - read comments above your post- I am NOT supporting the “bubble price” In fact I think prices need to drop even more, before the bubble is fully “un-wound;” However, it is important that the slid down stop when it is fully un-wound, not continue to excess. With government taking many homes off the market via economical process I suggested, avoiding this “over shoot” excess can be achieved. Government makes a shortage of houses for sale, by terminating sales of home it owns, even if they could be sold at a profit, or even active buying more as an investment, if need be to stop over correction.

    (2) It is certainly more economical than buying ALL the mortgages in the various derivative packages with no current market, because the government does not buy ALL - probably less than 5% only, certainly less than 10% of them. Furthermore, it is not buying any mortgages -it is buying real houses, not paper "assets." Furthermore it is not paying "out of Treasure pocket" even the full amount of the un-paid balance, which of course is less than the original mortgage amount. Treasury expense on say 7% on the mortgages in the toxic trash packages, is only the DIFFERENCE stated above as the FHA takes over the mortgage. (Yes, the entire amount of the unpaid balance will need financing by sovern wealth funds etc. They will be more willing to do so as Uncle Sam is buying REAL assets, not paper trash. GWB's government has come to them so often with hat in hand, that they may demand a piece of the potential profits. That is more like the Islamic bond idea. I.e. not charge Uncle Sam any interest.)

    For example, suppose the highest foreclosure auction bid was $80,000 and the un-paid part of mortgage is now $100,000 of an original $120,000 face-value mortgage on home that was purchased for $150,000 some years ago but with bubble, the price had climbed to $250,000. Then the net debt increase of Uncle Sam's debt is only $20,000. Uncle Sam is not supporting the $250,000 dollar "bubble price" as you misunderstand my plan. Surely you will agree that if any investor, Uncle Sam included, buys an asset with a just demonstrated value of "v" for price of "V" (V > v), his net worth's negative step is only V-v, not V. "Net worth negative step" is just another way to say "debt increase." As this government action only is applied to ~7% of the mortgages in the toxic packages, and only causes a net debt increase of about 10% (was less than 10% in my realistic example), 0.07x0.01 < 1% of the cost of buying ALL at the "bubble price" Also note Uncle Sam is buying houses, not paper promises, called mortgages!

    (3) See immediately above, but I have question: How did the Swedish plan "stick the bubble enablers with loss."? I definitely want to do that. IMHO they were CRIMINALS running the world's largest ever Ponzi scheme. (I will soon separately post more on this POV, by copying my comments now at available on line in replies section of the second lead article at The Economist and posting them here.) In brief summary: Some jail time would be a good deterrent against this mess being repeated. Paulson's Plan does not even recognize the CAUSE of the current mess; much less do anything to prevent its reoccurrence. -In fact, Paulson’s bail out almost assures these criminals will do it all again.

    (4) No, Ponzi schemes are ILLEGAL. See my next post here (a copy of my post in the The Economist adjacent in blue letters). As observed there, these "Ponzi men" were also some of the slickest "con-men” the world has ever seen. For both reasons some need to do Jail time, and all of their bonuses and golden parachutes benefits must be returned to their firms. - That is how to make their firms financially whole again, not send a bill to Joe American. ( GWB has already screwed Joe. Don't let the ex CEO of Goldman Sacks do it too.)
    Last edited by a moderator: Sep 29, 2008
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  7. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    As promised in prior post, below in blue, is my post in current issue of The Economist See article "Question of Equity" which has subtitle: "Salary caps are a rotten idea; but the crisis also carries lessons for regulators and workers." Both this and the cover article concern Paulson's plan. Surprisingly (to me and 90+% of the others making comments) The Economist fully supports the Paulson nonsense. (As many of you know, I know nonsense when I read it.

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    September 28, 2008 22:04GMT Billy T wrote:

    From article: “…hundreds of thousands of finance professionals want work.”
    I suggest a job in the prison laundry for some because Ponzi schemes are illegal.

    Promoters of innovative new loans types said:
    “You do not need any money down. We will not check your stated income. Just sign on the dotted line. In a year or two, you can sell
    (“to a greater fool,” was not said) and make a profit.”
    So Joe American signed.

    The writers of these new mortgage types knew, or should have, that it would all collapse some day, but only after they collected their big bonuses. When the end approached, they could get out, with golden parachutes. They ran the biggest ever Ponzi scheme – Just like a chain letter, it was destine to collapse.

    Yes, they are talented. - Talented criminals. I don’t want to “cap their salaries.” I want them prosecuted as Ponzi felons and, if convicted, ALL their bonuses returned to their firms, with interest. If they cannot do that, then cease their ill gotten assets and sell them. It is well accepted principle of law that criminals are not allowed to keep the loot they took, even if it was obtained with the miss-informed consent of the victim. That just makes them con-men as well a Ponzi crooks.

    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.

    A real cure must:
    (1) Restore liquidity to financial system. (By insuring all mortgages are fully paid.)
    (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.

    All five are simultaneously possible with less cost to the government than Paulson’s Plan.

    I then said "See details of how." and gave link to earlier post in The Economist's comments sections which was nearly identical to the OP here.
    Last edited by a moderator: Sep 30, 2008
  8. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    In about 35 days the government will start doing much of what I recommened more than a month ago. Even Paulson seems to now recognize his original plan is stupid. Unfortunately slightly more than 1 trillion has been transferred to the banking/ financial system already (with essentially no success in easing credit - just as predicted in this thread before Congress even passed that stupid "buy toxic trash to give money to banks with no strings" Paulson plan)

    Here is the modified version (now getting close to my plan posted in this thread):

    "...The new approach, which goes into effect Dec. 15., will become a model for loan servicing companies, which collect mortgage companies and distribute them to investors. These companies have been roundly criticized for being slow to respond to a surge in defaults.
    To qualify, borrowers would have to be at least three months behind on their home loans, and would need to owe 90% or more than the home is currently worth. Investors who do not occupy their homes would be excluded, as would borrowers who have filed for bankruptcy.
    Borrowers would get help in several ways: The interest rate would be reduced so that borrowers would not pay more than 38% of their income on housing expenses. Another option is for loans to be extended from 30 years to 40 years, and for some of the principal amount to be deferred interest-free.
    While lenders have beefed up their efforts to aid borrowers over the past year, their earlier efforts have not kept up with the worst housing recession in decades.
    More than 4 million American homeowners, or 9% of borrowers with a mortgage were either behind on their payments or in foreclosure at the end of June, according to the most recent data from the Mortgage Bankers Association ...

    After more than a year of slow and weak initiatives, there appears to be a serious effort to get at the heart of the credit crisis: falling U.S. home prices and record foreclosures ..."

    Blue text FROM:

    As I repeatedly said: Paulson's plan treated a symptom, not the cause. Finally the US government seems to understand this.
    However, it is doubtful that Paulson and his team were so stupid as to not realize this.

    So why was that trillion given to the banks?
    I can only speculate; but as Paulson and most of his team came from Goldman Sacks and all of GWB's choices / appointments tend to follow the Republican "trickle down" ideology, helping the banks instead of the home owners in over their heads came very naturally to them.

    So that leads to the question, why are they changing plans NOW?
    The answer to that seems clear also: Obama will be the next POTUS and has been advocating aid to these home owners for several months.
    Paulson and his team want to strike before he can so it will look like they, rather than Obama, took steps to reduce the rate of foreclosures, instead of Obama.

    If McCain had won, the same failing policy of helping the banks could have continued.
    Last edited by a moderator: Nov 12, 2008
  9. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Paulson finally has adopted my suggestion (OP this thread): I.e. automatically buy ALL homes that at foreclosure, which do not bring bids equal to the mortgage debt for that debt. He still does not have it quite right for max efficiency, but he is getting close now:

    “Secretary Henry Paulson said his department… may use funds from the $700 billion bank rescue plan to help homeowners. “We are actively engaged in developing additional programs to strengthen our financial system so that lending flows into our economy,” {Essentially none of the funds given to banks have done so! They have been used to buy smaller banks, strengthen the books, and invest in foreign lands. – Where higher returns are available.} The Treasury has committed all except $20 billion {I.e. 330 billion wasted on his stupid plans.} of the first half of the TARP funds in injecting capital into banks, AIG and Fannie and Freddie. ..."

    Non-blue text from: http://www.bloomberg.com/apps/news?pid=20601087&sid=a51haSEfx_ms&refer=home

    Here is the latest “trickle down” of tax rebates and relief (to Spain this time)*:

    “Henry Paulson gives the U.S. bank $45 billion in taxpayer money to keep it afloat and get it to pump some money into the emaciated U.S. lending system and what does Citi do? Buy a Spanish highway operator.
    Yes, you heard right. A Citigroup infrastructure fund agreed to take over Spain's Itinere from Sacyr Vallehermoso in a deal valued at about $10 billion, which includes about $6.3 billion in debt that Citi will take on. Just what Citi needs: more debt. …”

    From: http://www.thestreet.com/story/1045...citi-takes-cash-to-spain.html?puc=_htmlbooyah
    *It is obvious that giving money to banks and rich investors (all forms of tax rebates/ reductions included) will cause them to invest it where they think the returns are greatest. GWB's 8 years of "trickle down" stupidity did not help Joe American - it hurt him, as it helped build the modern factories in China and fancy housing developments in Dubai, etc.

    After wasting 330 billion of US tax dollars, with at best zero results,** even Paulson seem to now understand this and is again modifying his plans (too bad only 20 billion is left for him to spend) to buy real assets form poor people (not rich ones) I.e. the homes being foreclosed, as I sid he should in the OP, weeks before Congress gave him any funds.

    **I think still mainly negative b enefit to Joe American as these fund either have been used to reduce the competition between banks (the big ones are buying the small ones) OR to make foreign economies more efficient and productive. (like Citi purchase and refurbishing of Spanish highway)
    Last edited by a moderator: Dec 1, 2008
  10. TruthSeeker Fancy Virtual Reality Monkey Valued Senior Member

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

    USA has "free-enterprise / anti-socialist" POV so is only supplïng money to the banks, which they of course (as any good capitalist would) invest in building factorys in China, luxury homes in Dubai, even roads in Spain, etc. as the returns are greater there than in the US.

    In the US, the big banks, which got US tax payer funds, do buy up smaller banks to lessen the competition.

    What did Paulson think they would do? Lend to Joe American, who can not pay his current bills? or lend to some small American business man, who is having trouble even getting buyers into his store (offering deep discount "loss leaders" and 50% off second item, etc.)?
  12. iceaura Valued Senior Member

    The 120k in your example would be the bubble price I referred to - the mortgages for more than the houses are (or were, minus bubble) worth.

    As I understand things, and would recommend anyway, the Swedish government bought the example house for 80k, or some "market" value figured by detrending the price graph to eliminate the bubble. They did that to avoid foreclosure, among other large costs eliminated. That was key.
    See above, as I understand things. (Knowing the Swedes, I would not be surprised by some slack in the actual operations).
    The operations of the financiers in the credit default swap market and similar derivative markets were specifically made legal by legislation and executive order. The only laws broken in this mess were broken locally, in deceptive evaluations of real estate or improper steering of naive borrowers for kickbacks, things like that.
  13. TruthSeeker Fancy Virtual Reality Monkey Valued Senior Member

    Exactly! And look at what Lula is doing in Brasil! It's brilliant! Did you check out that thread already?

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

    Originally Posted by billy
    For example, suppose the highest foreclosure auction bid was $80,000 and the un-paid part of mortgage is now $100,000 of an original $120,000 face-value mortgage on home that was purchased for $150,000 some years ago but with bubble, the price had climbed to $250,000. Then the net debt increase of Uncle Sam's debt is only $20,000.

    Why? That was the mortgage on home sold for $150,000.

    I gave more details as I do not think there is any one "bubble price." It is a function of the time. In my example, when the current owner (now going into foreclosure) paid $150,000, he paid a "bubble price" later when the house value climbed to $250,000 that was also a "bubble price." Clearly, when no one would pay more than $80,000 for it the "bubble had burst."

    My plan was designed to avoid several things that made Paulson's plan unworkable:
    (1) There was no way to know the value of the "toxic trash" Paulson planned to buy from the banks. - They were "toxic trash" precisely because there was no market for them. - No one had any idea what their fair value was.

    (2) Most of the mortgages in the "tranches" were being paid on time and thus there was no need to spend Joe American's taxes on them. I.e. my plan only buys the mortgages at or going to auction. And then only buys the ones which can not be sold for at least the still outstanding mortgage.

    (3) Thus, by government buying ALL, but only the mortages that can not be sold for at least the remaining mortgage balance, the bank's "toxic trash" is made free of any defaults, without need to set any prices or even to send a gov. rep. to the auctions. (The properties that fail to recieve bids equal to the remaining due mortage are AUTOMAICALLY BOUGHT BY THE GOVERNMENT. - Bank or other owner just deeds the property over to the FHA. Ususally the owner will do this even before there is an auctions and his bank/ mortgage granter gets the check from FHA paying off the mortgage. So the foreclosed owner is debt free and avoids the losses associated with the auction. Often the FHA will let him live in "his" house and only pay rent to the FHA. - See more options in footnotes to OP.)

    (4) Paulson's plan did not even address the foundation of the problem: Too many "Joe Americans" were living in houses they could not afford. They bought expecting the bubble to continue inflating forever. (or at least until they sold to a "greater fool" at a profit)

    (5) Paulson's plan gives funds to banks etc. with "no strings" so of course they used it to buy smaller banks, invest in fancy property developments in Dubai, finance new modern factories in Asia, even to buy a toll road company in Spain. (Just two days ago, after getting 20Billion more, Citi bought that Spanish firm for 10Billion and assumed 6+billion of it debt!) The net effect has NOT been to make the banks lend to US small business or home buyers - Noneone should have ever expected lending in the US to occur under the "no-strings" Paulson plan when much higher returns are available in other countries with growing GDPs.

    (6) There are other flaws also - hard to understand how such a dumb plan could be expected to work!

    I do not like ANY plan that requires some human scheme (evaluators) to set the purchase price - that is recipy for bribes and fraud on Joe American. The object was to convert the "toxic trash" into zero loss assets. My plan does that much more cheaply and gives the government ownership of real assets (the homes) and much more. For example, it solves the basic problem of getting the foolish buyers into homes they can afford. -See OP again for more of why it is the best plan - Paulson is slowing approaching it with this recent revision,(No 4?) but still not nearly as good or effective as my plan and has only 20Billion left. (He has squandered 330Billion on his stupid plans, with no useful effect!)
    Last edited by a moderator: Dec 3, 2008
  15. iceaura Valued Senior Member

    Then you are supporting the bubble price - the last market established price before the foreclosure sale - and putting the industry through the massive foreclosure wringer, simultaneously.

    Plus you are dumping tens of thousands of houses on the government - which is not capable of managing such a huge property.

    And the opportunities for fraud are just as evident: the foreclosure market would be a no-lose proposition, for the mortgage lender.
  16. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Wrong on all three.

    (1) No, I am only paying off the REMAINING PART of the prior mortgage when no bid at auction will. Most of these mortgages are for 80% or less of the full value of the house some years ago. (And part of the mortgage has already been paid.)
    For example in my prior example (blue of my prior post) the peak of the bubble price was $250,000 and the government is buying full ownership of the home for only $80,000. THAT IS HARDLY "SUPPORTING THE BUBBLE PRICE"!

    Your comment: "and putting the industry through the massive foreclosure wringer"- is silly, without foundation and exactly wrong. Nothing I propose will increse the number of foreclosures.
    In fact most now occuring with "under water" homes will be avoided as the owner will want to avoid the cost (which come out of his pocket) that is associated with auctions (ads in the newspaper, the fees of lawyers, the auctioneer's fee, etc.) By mailing the mortgage and deed to the FHA his only cost is postage and he has the hope of getting some money back when the FHA later sells his house. Only the very stupid with an "under water" home will not avoid foreclosure this way.

    Furthermore keeping these homes off the real-estate market and in government ownership for a few years, will REDUCE the number of houses being forced into foreclosure as the current acceleration of the supply of un-sold homes on the real-estate market is doing. My plan is about the only way I can think of to slow the current depression of home prices (by keeping some homes off the reale-estate market.)

    (2) I do not know how many homes that go to auction do not sell for at least the still outstanding mortgage. True, a very small fraction of homes are “under water” and most of those are unoccupied as the owner just “walked away.” Most with mortgage paid down for a few years will sell for at least the remaining balance, but most with mortgage equal to 100% of the recent "bubble price" and mortgage only paid for a year will be bought by the government.

    Of course, the government/ FHA will not manage these homes directly. It will do exactly the same as any real estate firm does – hire professional managers. My son in-law is sort of a “slum land lord” with 8 (or less, I think he is now selling all to invest in the Brazilian stock market now.) properties rented in Sao Paulo. Even he has a management firm to keep them in repair, collect the rent etc. All he does is decide when to sell or to buy more. – FHA would do the same with much lower cost per home managed.

    The alternative is to have the owner evicted, and "dumping tens of thousands of houses" on the real estate market, which already has more than year of unsold homes dropping ever lower the prices. Adding these homes also the unsold market supply will further drive the home prices down and that will make even more homes be "under water" - worth less than their mortgage. That will make ever more owners simply "walk away" (default). Someone must take these homes off the market for a few years. - Only the government can do that. (And must do that to prevent a self-accelerating downward spiral in home prices, depression, surging welfare costs with the evicted, etc..)

    (3) No, "opportunities for fraud" are ABSENT.
    If there is a bid at the auction higher than the remaining mortgage, then both the current owner and the bank will accept it rather than sell for the lower price of the mortgage the FDA will automatically pay (after inspecting the documents, of course). (Even the auctioneer, will want that higher price as usually his fee is based on the price of the sale to some extent.)
    If there is no bid at the auction higher than the remaining mortgage, the bank (or mortgage holder) sends the mortgage and the Deed to the FHA. After examining these documents, the FHA send the check back to the holder of the mortgage, with perhaps a slight "processing fee" deducted.

    Everything is a matter of public records. - For example, both the mortgage and the Deed are open to inspection in the county land records. (I have bought and sold several properties. I always went to the land records office and did my own title searches. One on 16 acres I was buying in Howard Count MD I ran the deed back into the early 1800s - It was very interesting. One sale of it was when it was part of a much larger tobacco farm. The owner had died, and every seven days two more of the heirs came to town to sign off on the sale. I used a universal calendar to learn it was always a Saturday. - I think they had a two person buggy and combined it with their Saturday trip to town to do the week's shopping.
    Last edited by a moderator: Dec 3, 2008
  17. iceaura Valued Senior Member

    In your description, it appeared to me that you were having the government guarantee the 120k nominal current value of the mortgage, for a house that would fetch 80k on the market.

    Not obtaining the house for 80k.

    If the government is not liable for the mortgage value, but obtaining the house for the current market value, under your plan, than I have misunderstood completely and withdraw my complaint about supporting the bubble prices. I then wonder at your asking how the mortgage holders were being stuck with a loss.

    I also can't figure out how you are going to run these foreclosure auctions without opportunity for bribery and collusion - when everyone knows the house will not be sold to them for less than its current mortgage value, if I am following this.

    And finally, I seriously doubt whether the government is capable of managing property of this kind at this volume on this short notice. This would be a brand new thing, and aside from somebody like Halliburton with all that implies, who's going to do it?
  18. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    If I asked that then it was a "retorical question" - trying to make it clear then the mortgage holders (and every mortgage in the toxic trash tranches) will be paid in full -Hence the toxic trash is no longer "toxic" and at much lower cost to the government than trying to buy up all the toxic trash. (Why buy the still being paid mortgage in the tranches also to do this? Even Paulson admits his original idea failed.)
    I have already explained why corruption is impossible. If you disagreed, explain how it could occur.
    Also most (>95%) of underwater homes now going to foreclosure will instead go directly to the FHA. No one not willing to at least pay off the mortgage balance would go to the auction. Effectively I end all auctions which now occur and leave the occupant of the home still owing money to the bank. (Only way he can avoid that nows is to file banrupcy. For example, if the now un-paid mortagage balance is $80,000, but the best bid is only $70,000, either the mortgage holder refuses to sell or sells and keep the occupant on the hook for $10,000 plus all the expenses of the auction. If he later gets a good job, you can be sure the bank will be taking part of his monthly pay check until this debt is paid off.

    He is much better off to be immediately debt free and can be by sending mortgage and deed to FHA, and then trying to negotiate a rent he can afford to pay. (My plan even had a one year quasi-grace* period on this rent to let him look for housing he could afford if he can not afford even to rent back "his" house from the FHA - He may need to move to lower cost unit, even just a trailer. Please read the OP as you do not understand my plan. People in homes they can not afford is the real heart of the problem - unlike Paulsosn still, I address that, not supply funds to banks for investing in Dubai etc. or buying up smaller banks.

    I will not bother to look up names of real-seate managment firms, but almost all apartment complex in the US use one of them There are 10s of thousands of them. The number of properties already that these firm manage for the owner is huge compared to the number of properties the FHA would be getting in the next few years. Again you need to read the foot notes of the OP - There I note that renting back to the prior owner has many advantages, not the least of which is that he will not trash the house like a renter planing to move may.

    Please try to understand my proposal before attacking it.
    "Quasi-grace" as he gets five years to pay the months (up to 12) of rent while he remains in the house while looking for housing he can afford. Again read the OP.
    Last edited by a moderator: Dec 3, 2008
  19. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Here is the latest example of what is wrong with Paulson's plan still (Recall two days ago Citi used the extra 20 billion it recieved the day before to buy a toll road company in Spain as another example):

    " Dec. 3 (Bloomberg) -- The Port Authority of New York and New Jersey attracted no bids from investment banks interested in underwriting a $300 million taxable note offering in another sign that the seizure in credit markets persists. ...{These bonds} carried the highest short-term ratings from Moody’s Investors Service, Standard & Poor’s and Fitch Ratings and would have been the largest of its kind in eight months.

    “It’s astonishing,” said Fred Yosca, managing director and head of trading at BNY Mellon Capital Markets in New York. “A household name, like the Port Authority, not being able to get a bid is truly a sign of a market that is in distress.”

    From: http://www.bloomberg.com/apps/news?pid=20601087&sid=aJ1hKONFMNYU&refer=home

    Billy T comment:
    Trickle down works for someone, just not Joe American or US small businessmen. It will ALWAYS send the AVAILABLE investment funds to where the returns are best - that is not the USA now.

    GWB and Republican Trickle Down helped build the modern factories in China, killing Joe's jobs, and the luxury resorts/ residental units in Dubai etc.
    Ironically, GWB and the Republicans do not understand how capitalism works in the modern global economy! - They thought making more funds availabe to the already rich would trickle down to help Joe American and small business in the USA. It did exactly the opposite, and left Joe (and even his great grandchildren) with huge debt, which they can not pay, so dollar will collapse and depression worse than 1929 is on it way - just a question of when, not if now. IMHO, even Obama's ability to inspire etc. and his excellent team, can not undo the damage GWB, and Republican neocons* have done.
    *They were more interested in making wars to fuel the profits of the oil and war industry they mainly came from.
    Last edited by a moderator: Dec 3, 2008
  20. iceaura Valued Senior Member

    The remaining mortgage balance is the bubble price I am claiming your plan supports.
    So you are not using the auction - or any market mechanism - to set the market price for those mortgages ?

    In fact, the auction part seems to be extraneous in general, an unnecessary detour through the foreclosure labyrinth with attendant runups in overhead.
    I admit that I do not understand your plan, as you describe its operations and deny my questioning of apparent problems. Reading your OP does not help. It was from your OP that I got my questions.
    This is the part of your plan that makes sense to me. Guaranteeing the bubble price to the banks seems to work against it. Hiring expensive property managers on short notice to handle tens of thousands of private homes converted to rental property and owned by the Federal government works against it. Launching play auctions in which the bidders and bankers know in advance the high bidder will be the Fed works against it. Or what am I missing?

    Look, I think your approach is at core much better than the current nonsense. It's details that I question.
    Last edited: Dec 4, 2008
  21. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    You must never have had a mortgage. If you did you would know that the "remaining unpaid balance" is always a definite number. - It is not set by any "market mechanism." Each payment you make, usually monthly, reduces that "remaining unpaid balance." (Slowing in the initial years as then your monthly payment is mainly applied as interest on the loan, but as the "remaining unpaid balance" is reduced the reduction is greater with each new payment.) While it might be possible in principle to sell the mortgage at a slight discount, do so would not give the banking system a 100% guanantee that none of their current "toxic trash" could remain toxic. Effectively in my plan, rather than buy all the toxic trash (most of the under lying mortgages are being paid on time) the government only guarantees that now owner of the toxic trash will take any losses. I.e. immediately converts all toxic trash in guaranteed asssets, but without buying any of this complex paper. Government buys real assets and helps stop the slide down spiral and gets the foolish buyer of a home, which he could not afford to buy, into housing he can afford (Often perhaps he just remains in "his" house and rents from the FHA.)

    I am sorry if it is not clear, but ask any specific question; you want and I will try to answer it. First however, stop speaking about A "bubble price." As I have explained already that price is constantly increasing during the bubble and then more rapidly dropping when the bubble collapses.
    Again I am not doing that and there is no single "bubble price" on even only one home I could guarantee even if I wanted to! I am guaranteeing a precisely defined (at any particular time) "floor price" equal to the then outstanding mortgage balance.

    For example, two identical, side-by-side houses could easily have different "government will pay" or "floor prices" as one may be still owned by the original buyer who has nearly paid off the mortage and one owned by a owner who purchased less than a year ago. It is highly improbable that the first will not attract bidders very willing to pay much more than the mortgage debt of the first, but certainly possible, if not highly probable, that the government will end up buying the second. (Thus, helping stop the downward spiral of home prices by not selling it for years. I.e. not adding it to the already excessive supply of "unsold homes.")
    If the second owner did get a 100% loan for the price a year ago, then you could say in this quite unusuall case that the government is supporting the "bubble price" of a year ago which is higher than the current market price. This is only a relative rare case, but in it the government is acting as the "greater fool"that buyer hoped to sell to later; however he is not getting any profit as he expected (that is what made the bubble) -only getting out without a large loss*. Many now in trouble bought many houses, expecting to sell at a profit in a few years. This "foolish demand" inflated the the prices of homes. They are now lucky to get out with only small loses (they did pay interest on their loans) and hopefully learned their lesson. (They would have had a profit if they had simply put the money into a saving acount, instead.)

    The nature of this guarantee is that if no one else will buy the house for that amount, or more, then the government will automatically (not even any expense of sending someone to the auction) buy full ownership for that price - I.e. the government pays off the mortgage and takes ownership of the house.

    I think you are. First there are thousand of firms anxious to manage rental proberty in the USA and they would typically do so for the FDA (a no risk payer of their fee) for a single digit percent of the monthly rent. Collecting the rent is no more problem than collecting the monthly mortgage payments is. (You may not realize it, but even if your mortgage was granted by bank ZYZ, that bank is not collecting your monthly payments, in more than 95% of all cases. They hired some one to do that or sold the mortgage to Fanny or Freddy who may do that collection (I do not know if they do or also hired some firm to collect the monthly payments) There ZERO additional work to do with collecting rents, instead of mortgage payments, each month. (Exactly the same number of checks are collected as rent checks replace mortgage checks.)

    The main problem is with repairs. If the brother of the management firm owner happens to be a plumber, then the houses that firm manages will likely have all their plumbing in good working order (if the owner of these rental properties has only a few houses he is renting). This abuse occurs now but would be greatly reduced if 120,000 houses are managed for the FHA by a dozen different management firms, each managing 10,000 properties. - With the comparison of the repair bills each of the dozen firms sends claims for each month the abusive firm is more easily noticed with the larger data base, compared to, for example, my son-in-law who has only 8 rental proberities. He trust his manager, but that manager could pad the repair expenses. Doing that significantly to the FHA would quickly be detected, then abusive firm would be fired, fined and procescuted for punative damages etc.
    Again ask me to explain any detail that is confusing you and/or pose in some concrete terms (not in generalities like "very subject to fraud") any problems you are concerned about.
    *Why should the banks be protected from large loses, if the home owners are not? Giving funds to banks, as Paulson did does not address the basic problem. - It does not even make credit more available as has "no strings" on how the funds supplied can be used. Mainly They have been was used to buy up smaller banks (reduce competition) and make loans for projects in other lands where the GDP growth is much higher than in the USA. Small US businesss men cannot get loans from the banks they have used for decades! Paulson has wasted** 330 billion dollars! (finally he seems to understand this but now has only 20 billion left to do better with.)

    ** Worse than "wasted" - he has supported economies the US must compete with, just as Republican "Trickle Down" economics under GWB did for 8 years - helping China build the most modern car and other factories in the world. It is hard to know which contributed more to failing US auto makers:
    GWB and this "trickle down" foolishness
    The stupidity and lack of foresight of Ford, GM and Chrysler's highly paid CEOs. I suggest they use their corporate jets once more. Jump out of them with their "golden parachutes" (UNAWARE that the cords of those parachutes have all been cut.)
    Last edited by a moderator: Dec 4, 2008
  22. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    "... Federal Reserve Chairman Ben S. Bernanke urged using more taxpayer funds for new efforts to prevent home foreclosures, saying the private sector is incapable of coping with the crisis on its own. The Fed chief outlined four possible options, including buying delinquent mortgages ..."
    From: http://www.bloomberg.com/apps/news?pid=20601087&sid=abINDLzbaE54&refer=home

    Finally you are getting close to the plan of the OP of this thread, but still do not quite have your evolving plans perfected:

    I.e. do not buy the mortgages from the banks or even think about trying to disect them out of the complex tranches most are now tied together in. That is a lawyer's aid program!

    INSTEAD: Pay off the mortgage (when no one else will) and take ownership of the house. When ever any house is sold, at auction or otherwise, during the settlement, the old mortgage is always paid off first. - So this FDA buying and paying off mortgage is nothing new. Always the new buyer pays off the old mortgages and takes title to the house; if however, as is the usually case, there is a new mortgage, then the bank or other granter of that new mortgage has a claim on the house, if that new mortgage falls into default. FHA will be the new buyer (of last resort) and does not need a new mortgage, at least not one specific to any particular house. Instead, it gets the funds to pay off the old mortgage from the FED, via Congressional approvial. Same way Paulson got 350 billion (first half of 700 b illion).

    ALSO do not ignore the foolish owner who bought more house than he could afford with the common assumption that the bubble would continue to grow forever. If the FHA is the new owner, in many cases, the current foolish occupant can afford to pay some reasonable rent and remain in "his" house. If he can not even pay rent, near the market value, then give him "deferred rent" (for max of 12 months) in which to find housing he can afford (even if that is only a rented small trailer or camp ground tent.)

    Point is that the basic problem MUST be solved. That problem is too many fools in homes that they can not afford. It does no good to ignore the cause and treat various symptoms of the problem. Paulson has already wasted 330 billion doing this, with only more damage produced in the USA. (See my earlier posts, especially both footnotes of post 38 adjoining this post, to understand how that 330Billion has caused a net damage to the USA.)

    See the OP for many other features of a more desirable plan, but Ben & Paul, keep modifying your plans, and you will eventually come to the one I proposed a couple of months ago - you are getting closer now.
    Last edited by a moderator: Dec 4, 2008
  23. iceaura Valued Senior Member

    OK, this difference in perception is the only real difference we have over this particular issue.

    I think it is very common that the current outstanding balances on the the defaulting mortgages (especially of the the speculators and refinancers that are the large majority of the problem) are bubble prices, with little equity buydown since (say) '04 or '05, and that buying the houses for that balance would support bubble pricing in that area.

    Nor would any "auctions" prevent that.

    We both know that. Why are you talking about setting market prices for these houses at some kind of auction, an "auction" in which everyone knows going in that the house will not be sold for less than the mortgage balance?
    You also have serious problems with ongoing maintenance, utilities and taxes, insurance, assessments and easements, evictions, and so forth. I suspect that property managers that handle large numbers of separate, single family dwellings are not nearly as numerous or as capable of expanding their inventory as you assume, that they won't be cheap, and that the opportunities for fraud etc are much larger and more varied than your plan allows.

    But again, this is a matter of perception, a judgment of the situation. I would prefer the government buy houses at market,or otherwise negotiated real value, price.

    edit in: come to think of it, your plan of having the US government owning rental property in blighted neighborhoods officially assessed at bubble value, would be a great boon to local government - property taxes on rental property are much higher than those on owner-occupied dwellings in my state, for example, and the boosted value of the assessment contributes still more. Interesting.
    Last edited: Dec 6, 2008

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