"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)
    0.0%
  2. No, but quickly with the mods suggested in my post.

    25.0%
  3. No, problem is not so bad that market can not fix.

    25.0%
  4. No, There is no point. USA and EU are doomed.

    50.0%
  1. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Messages:
    23,198
    That would work just fine, but is essentially impossible to do now without 100 billion or more in legal fees.

    The mortgages are not owned by one person or firm anymore. They have been sliced and diced a 100 times in different ways to be distributed over many separate complex tranches (even "squared tranches" or “tranches of tranches”).

    I bet to buy back 100% of Foolish Fred's mortgage, it would cost more than FF’s mortgage because:

    Goldman Sacks Tranche ca 125 owns 0.003% of FF's mortgage and Greedy George owns the highest risk level of ca125, etc.
    Goldman Sacks Tranche ca 126 owns 0.003% of FF's mortgage and Timid Tom own the low risk (first to be paid) level of it etc.
    ...
    Morgan Stanley’s MS 28 Secure Trust owns 0.001% of FF's mortgage.
    etc . for a few hundred other tranches and tranches squared, etc.

    That is why they speak of buying "toxic trash" contracts, not individual mortgages.

    It all reminds me of the scheme sometimes used to block a road. A small critical parcel of say only one acre is sub-divided into 10,000 lots each of 0.0001 acres and sold to 10,000 different owners for a dollar each. - Then the cost of the eminent domain court cases is more than the cost of the road.

    The Am Bar Assoc. thinks your idea is the best!

    Please Register or Log in to view the hidden image!



    Lucky Lou was in over his head, just like FF was but then he won the state lottery and is paying his mortgage to the collection agancy, CA, every month. CA take his $1050 payment, deducts its $50 processing fee and than sends electronically $3 each to the accrual accounts of GS ca 125 and 126 .... and $1 to MS28 Secure Trust, etc.

    I.e. it is simple with computers and electronic fund transfers to distribute money, but impossible to un-bundle the mortgages out of the many and complex tranches, especially if even one owner of a tiny part of one sub risk level of one tranche does not want to sell back his interest.
     
    Last edited by a moderator: Feb 5, 2009
  2. Google AdSense Guest Advertisement



    to hide all adverts.
  3. 2inquisitive The Devil is in the details Registered Senior Member

    Messages:
    3,181
    Billy T,
    Billy, you are still suggesting the government buy the mortgages from the banks, based on the amount owed on the mortgage rather than the market value of the house. The government, i.e. the taxpayer, is over paying for the piece of property, they assume the loss rather than the bank that held the mortgage.
    How much should the rent on a $200,000 mortgage investment be? What if the market value of the house is $150,000 instead of the $200,000 invested? If the current occupant defaulted on his loan payments, why would you think he would not also fail to make his rent payments?

    You do realize the government (the taxpayer) would also be responsible for upkeep and repairs, local real estate taxes, insurance, etc. on a rented property?
    That is just extending to another cycle what many freeloaders have already done. They bought homes with no money down, drew equity out of the house via inflated valuations by crooked appraisers, used some of the money from withdrawn 'equity' to make a couple of payments, lived in the house for months until they were four months behind in payments, and then lived in the house a few more months while the mortgage holder went through an expensive and slow foreclosure process through the courts. So you propose the government (the taxpayer) should let them live in the house another 12 months rent free?
    Real estate taxes must be paid to local government on the house regardless of who owns the house. If the house is in the occupant's name, he is responsible for the taxes, insurance, and upkeep. If the house is in the FHA's name while rented, the government (the taxpayer) must pay those expenses. I don't know how you define "immediate eviction" as a foreclosure and eviction is a lengthy process, undertaken when the homeowner is months behind in his payments. It is no 'surprise'. The "eviction rage" would still presist when the government kicked the occupant out of the house, after 12 additional months or whenever.

    I tend to believe the 'best' solution would be to give the homeowners a low interest rate refinancing, backed by the government (the poor taxpayer again). That way those homeowners that have income will have a much more affordable payment. Unfortunately, people without jobs and those that lied about their income to begin with may not be helped by cheaper mortgages. The government (the taxpayers) will provide unemployment benefits to those that lost their jobs and wellfare to those that do not work, but it is not our responsibility to provide new homes for them to live rent and payment free.
     
  4. Google AdSense Guest Advertisement



    to hide all adverts.
  5. iceaura Valued Senior Member

    Messages:
    30,994
    The prices of houses are too high. There was a real estate bubble, a severe one. If the government attempts to prop up these bubble prices, it will do harm.

    In your plan, the government is apt to end up owning a very large number of houses for many years, which it will be unable to rent for enough to cover its ownership costs (the bubble price of houses outpaced rents for the last few years of the bubble). This will be a serious mess. The Fed should sell the houses at market.

    The part of your plan where the homeowner simply hands the deed to the feds, who then bail out the bank for its mortgage, seems possible - the taxpayer absorbs the bubble loss when the house is sold, but the taxpayer is getting shafted here regardless. But the whole negotiated rent, bank tries to sell at auction, etc, looks like a can of worms.
     
  6. Google AdSense Guest Advertisement



    to hide all adverts.
  7. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Messages:
    23,198
    Agreed, but I am not trying to "prop up" bubble prices. Just trying to stop the slide down about at current prices - down ~25% now and dropping ever faster as it is now feeding on its self. I.e. some "strong hand" needs to buy and keep the homes with defaulting mortgages off the re-sale market for a few years.

    The number of defaulting homes is still relatively small fraction of all. In case you have not noticed: It already is a "serious mess." I am just trying to keep it from getting worse.*

    No, bold part is not quite correct. First because no one knows if the future sale will cover the price and loss of interest on purchase (opportunity cost) and expenses while renting. Secondly the FHA pays ONLY the un-paid mortgage balance, not the "bubble losses." The "bubble losses"are "paper losses" that could have been profits IFF the owner had sold at the peak. For example:

    If the bubble loss are now say 30% down from peak of the bubble and owner bought a few years prior to the peak with 90% of price as the mortgage (Roughly a typical case as many thought 90% loan would be well cover by the rapid rise of home prices then occurring. "No money down" loans came later.) then he has lost approximately all of his "paper gain" during the bubble collapse. (ASSUME EXACTLY his paper gain is lost to keep it simple.)

    Perhaps the mortgage still unpaid balance is now 85% of both what he paid and the current "market value." In this case the FHA would be lucky to get his house at 85% of current market value. Only reason FHA would not get the house is that private buyers fear that next year the "market value" may be more than 15% lower still, so they don't buy at current "market value." (As house did not sell at "market value" - I.e. there are no buyers but the FHA, you can rationally argue that the market value is lower, but the price at which the house will sell in a few days, or at auction, is called the "distress value." Some house have been sitting for sale for even a year as owner tries to get "market value.")
    -------------
    * I expect my efforts to fail -i.e. a deep depression is coming, but I feel obligated to try as my grand children all live in the USA. Eviction, as below, is what I am trying to make less common.

    Please Register or Log in to view the hidden image!

     
    Last edited by a moderator: Feb 6, 2009
  8. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Messages:
    23,198
    The US is now trying to lock the 18 billion dollar bonus barn door after the CEO bonus horse has escaped. It is bad idea to let the CEOs etc. keep their excesive self awarded gains. True they cannot be prosecuted under laws passed later, but the IRS does have a few "fine tooth combs."

    Simply announce that every CEO and company executive who collected more than now permitted amounts will either refund the excess to their company or come in for a detailed IRS review of his last seven years of tax returns.

    Dillinger was never convicted for any crime except tax evasion and back then, in the pre computer age, the IRS combs were not nearly so fine. I am confident that 99% of the excess bonus collecting executives will not want the IRS to comb thru seven years of their tax returns with the modern tools.

    Let's help companies get some money back from those who profited, not from their victims, the tax payers.

    SUMMARY:
    The IRS should "Dillinger" those that do not "voluntarily" refund the excess of the collected bonuses and golden parachutes to their companies.

    -------------
    Collecting from hard pressed companies as suggested below is a bad idea without first collecting from the over paid executives as above would achieve.

    "... Another adopted amendment would require financial institutions that take money from the TARP program to repay the cash portion of bonuses topping $100,000 that were paid to employees for work last year. “This amendment makes it clear that it’s not enough to say that the excessive bonuses are wrong -- it requires that companies pay those bonuses back to our taxpayers,” said Senator Ron Wyden, an Oregon Democrat. ..."

    FROM: http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=a1RKDNnACm2Y
     
    Last edited by a moderator: Feb 8, 2009
  9. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Messages:
    23,198
    Tomorrow Geithner has promised (again) to give details on his plan, but like Paulson's, it too will fail as a real cure for mortgage based toxic assets 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.

    Here is a summary of my plan, which relatively cheaply achieves all 5 objectives:

    Have FHA buy (for price of unpaid mortgage balance) ALL homes going to foreclosure that do not sell for that amount (and then usually** rent back to occupant) instead of trying to sell these "toxic assets" to investors. This makes ALL mortgage based assets non-toxic as ALL mortgages in the tranches will be paid in full. These now valuable* assets can be sold by Banks etc. to raise funds for new loans, etc. – A perfect and cheaper antidote.

    “Cheaper” as most mortgages in the tranches are being paid. – No need to buy or find buyers for ALL the mortgages in the tranches. It also avoids needing to set any value on the toxic assets. Also keeps these houses off the "for sale" market for a few years. (Stems the slide down of home prices.) Tax payers get real, rentable assets for their dollars with probable capital gains in a few years, not “toxic trash.”

    Even the cost of foreclosures (typically more than $10,000) can and should be avoided: Underwater owner simply sends deed and mortgage to FHA, which pays off mortgage, month-by month, and takes title to house. If owner just walks away he remains in debt. Also a few years later, when FHA sells house back to private owner with capital gain, 50% of “excess profits” after recovery of ALL costs, including interest on the FHA’s investment plus (rent – repairs, etc.) are returned to the original owner to encourage him to avoid foreclosure losses. This route to becoming debt free plus the hope for some eventual gain will make most under underwater owners who cannot pay send title and mortgage directly to the FHA. This permits the FHA’s cost to be spread over all the remaining years of the mortgage instead of paying full mortgage balance at a foreclosure auction - another reason why this plan is superior way to met all five objectives above.
    --------
    *Actually slightly more valuable than owners of the tranches had hoped as the tranches had an assumed default rate in their structure, but the default rate is now zero with FHA making the monthly payments.

    **If the current owner cannot even afford to rent the house he was trying to buy, he pays FHA what he can to live there for up to 12 months while looking for housing he can afford. (If need be, only a rented trailer.) The unpaid part of his fair market rent accumulates as an FHA extended line of credit, which he must pay back with market interest over next five years. Thus, it is in the former owner's interest to relocate as quickly as he can. This helps to avoid "eviction rage" which via smashed toilets, burn holes in rugs, etc. usually costs many thousands of dollars to fix. It also helps the former owner to keep his dignity – the neighbors need not know he sent deed and mortgage to the FHA and moved away.

    See OP for more detailed discussion of how the five objectives are achieved at:
    http://www.sciforums.com/showpost.php?p=2025940&postcount=1

    Also see letter I sent to Obama at:
    http://www.sciforums.com/showpost.php?p=2095292&postcount=11
    That post gives a suggestion built on Gresham's law to avoid inflation while stimulating economy (and six other advantages, including great reduction in import of hard drugs) in a quick summary.
     
    Last edited by a moderator: Mar 19, 2009
  10. iceaura Valued Senior Member

    Messages:
    30,994
    House prices are bubbled - they have to slide. They should be lower, five years from now, than they are now.

    Your plan attempts to prop them up.

    Your plan also overlooks the variable rate mortgage setups behind many of the defaults - if the Fed doesn't pay them, the financials remain trash. If it does pay them, if pays a fortune for the house.

    Fixed rate mortgages for which the holder owes no more than the current market price of the house are not defaulting at high rates.
    The taxpayer gets either the ongoing cost of landlord ownership of a money-pit followed by loss at sale, or a permanently bubble-priced housing and rental market impossible to break into with ordinary income and sound mortgage lending practices.

    Your plan works if the loss to the taxpaying public is recognized and allowed for - the government should plan to lose tens of thousands of dollars on each of these houses it acquires, and needs to budget accordingly.
     
    Last edited: Mar 18, 2009
  11. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Messages:
    23,198
    1) During GWB´s 8 years, house prices dramatically rose and, except for the wealthy, real incomes declined, so I tend to agree a major correction downward in home prices was (and is still?) needed; however it is hard to know where it should stop. My plan does not prevent further decline – if you think so, then you do not understand it. My plan will terminate the negative feed back that foreclosed homes (prior owner becoming a renter) being dumped on the market (excess supply) is making.
    If that continues, then one can be sure there will be serious “undershoot” of the correct price level that supply and demand would otherwise determine. Demand for owner occupied homes should be mainly the net of new family being formed plus homes destroyed for various reasons (fire, in way of new road, excessive age, termites, etc). Supply should be mainly new construction, not foreclosures forcing owners to become renters. As few are building new houses, currently supply is mainly via foreclosure. (People moving, selling one, and buying another can make local shortage or excesses, but are not really making net new supply.)

    2) No, that is false. It only terminates the negative feed back that causes the correct supply demand set price to be “undershot” as discussed in reply to (1) Again: My plan does not prevent further decline

    3) The FHA will always pay off mortgages. (That is what makes mortgage based “toxic trash” worth slightly more than the owners had even hoped. - They were expecting some default rate.) If the interest reset is excessive, the FHA just pays off the balance (or uses its market power to renegotiate). One beauty of my plan is that in most cases, the cost to the government is spread over 20 + or – 10 years and not all in 2009.

    As explained in post 66 (paragraph I just made blue for your), almost all “under water” owners will not let their house go to foreclosure auction, but will just send deed and mortgage to the FHA. Buying at foreclosure auction adds at least $10,000 of needless cost to society and forces the FHA to pay off the balance at foreclosure, not over many years. In many cases the FHA mortgage will not be fully paid when the FHA sells house back to private owner, at least at a nominal profit. (Assuming the rent covered the interest on capital and repairs. – Normally the rent does this AND provides a profit – why land lords exist.)

    4) Agreed. Another reason why my plan costs tax payers much less than buying toxic assets at a price the financial industry can accept. No need to pay (indirectly) for the majority of mortgages in the toxic trash as they are being paid by the house owners.

    5) No. The rent should at least break even while FHA is owner – most land lords make a profit. True, if the FHA were to sell back to private ownership in next few years, there is a good chance the price paid would not be recovered. Ideas is for FHA to hold until inflation and the pent up demand (builders are not building number of needed houses when economy has recovered now) allows FHA to at least get out even. When builders resume building, the FHA starts un loading, but not so quickly as to kill the builders – they make a essential part of a healthy economy as houses have a finite useful life and only if the population is decreasing are they not needed. - European builders do face this problem, but not in the f***ing USA. If there were fewer babies being made in US, then the demand for house would also drop – young couples could more easily “break into the home owner class” – again, the “correct” price is set by supply and demand.

    We need to get rid of population growth (a positive feed back) just as much as we need to get ride of the negative feed back (foreclosures force owners to become renters). I.e. get to a more stable cost of housing in real terms and end the bubble / burst cycles.

    6) GWB left Obama with a big economic mess. It will be expensive (and painful to many) to fix. My plan for housing and the associated mortgage backed toxic trash may even be a net cost to the taxpayer and not the eventual profit maker I expect it to be as an investment in America´s future. Certainly, it is a hell of a lot cheaper than what seems to be planned and importantly the cost is spread over more than a decade, not a crushing expansion of the debt in 2009.
     
    Last edited by a moderator: Mar 19, 2009
  12. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Messages:
    23,198
    US Treasury's illustration of Geither's plan (with two blue inserts by Billy T):

    Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
    Step 2: The FDIC ... would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio. {lend buyer* 6$ for evey one of his}
    Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
    Step 4: Of this $84 purchase price, {if accepted by asset owner} the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
    Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6. {In addition to lending 6 to 1, tax payers also match tha buyer's investment!}
    Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

    Billy T’s comment:
    The bank or owner of the toxic assets has option to not sell if price is too low. If bid were to be 84% of face many would be happy to take the 16% hair cut, but some would not. (Would hope that housing recovers and can either (1) sell foreclosed properties at a profit or (2) there will be no foreclosure and then they get zero hair cut as the mortgages are being paid. Certainly will offer the worst "dogs" they have first and see what bids they draw.)
    From the investor’s POV, buying asset at 16% discount from face and putting up only 6% of face as his own cash is not a bad deal. From taxpayer’s POV (assuming any profit is shared 50/50 with the investor and toxic trash is held until it recovers to face value) the risk of 72 + 6 = 78% of face for possible gain of 8% of face is not very attractive, especially if it will take a decade or more to get back to face value.
    I expect that the winning bid will be closer to 42% of face than 84% of face. If this is the case, very few sellers will accept it. Then this will just be one more plan that failed. Unfortunately, it will be June before we know and economy may still be sinking into depression. Too bad my plan** has been ignored (or more likely never even noticed).

    More details at: http://www.treasury.gov/press/releases/tg65.htm

    The "white paper"on program is at: http://www.bloomberg.com/apps/news?pid=20601087&refer=top_news&sid=ahWhEldj8090

    The key paragraph there is:
    "...The Public-Private Investment Plan: A Comprehensive Solution A key principle of the chosen approach is to use private capital and private fund managers to help provide a market mechanism for valuing the troubled assets. By creating partnerships with private investors, this approach should serve to both protect the interests of taxpayers over the long-term and help restore liquidity and enable price discovery in the markets for troubled assets in the short-term. ..."
    The hidden assumption here is that investors will pay high enough price for owners to accept.
    ------
    *Some private lender may provide buyer with cash and then Treasury guarantees the loan if with buyer only having 1 of 7 dollars as his.
    This is scheme with levergage and borrowing to solve problem caused by leverage and borrowing. :bugeye:

    Please Register or Log in to view the hidden image!

    :shrug:
    **This thread with latest summary at: http://www.sciforums.com/showpost.php?p=2197527&postcount=66
     
    Last edited by a moderator: Mar 23, 2009
  13. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Messages:
    23,198
    To clearly understand why letting bidders set the price of the toxic assets can (probably will) screw the taxpayers, even if it "succeeds" see:
    http://www.sciforums.com/showpost.php?p=2204127&postcount=206

    Once again note that my plan (see post 66 for recent summary) WHICH DOES NOT REQUIRE ANY PRICE TO BE SET ON THE TOXIC ASSETS, is so much better than this latest government plan. It is cheaper and spreads cost over more than a decade. It solves the fundamental problem, which all of the government's plans (Geithier's included) ignore. It makes the toxic assets instantly non-toxic and does not require any new administrative body to run etc as Geithner's plan does.
     

Share This Page