By Ed Smallwood
My most recent blog entry is so long that I'm going to have to divide it into several entries. I'll be posting one part per day until the election. First up is a quick overview, followed by what we have to do for the economy.
In the next several days we will have selected a new President. I can only hope at this point that good sense will take over and Senator McCaint will be shown one of the most humiliating defeats in U.S. History. I can also only hope that the Democrats get their Filibuster-proof/veto-proof majorities in both houses of Congress.
My biggest fear should this happen is that the Democrats will celebrate until late January, and then fall victim to infighting as to what should be done. This would be just what the Republicans would like to see. Divide and conquer. All the Republicans need is for the average citizen to believe that the Democrats are ineffective in ruling to take back Congress the following term.
This is what Congress needs to do in the next 4 years. If the Democrats take over, then we stand a chance of some of this being done. If the Republicans hold on just a little bit, our chances of this happening are slim.
The Economy
We must take care of the home mortgage crisis. This should be the number one concern of Congress right now—doubly so if we have to wait until late January. Corporations and the rich have had their bail-out, and its clearly not trickling down. In fact, in an article in the New York Times published on October 24th, Joe Nocera detailed an employee conference call he sneaked into with an executive of JPMorgan Chase where the executive stated pretty bluntly that the money they had received from the Federal Government was going to be used to purchase other banks, not to free up lending to individuals.
People have no money to buy things because they are paying so much of their income (more than half for some families in the Silicon Valley) for housing. This is leading to layoffs at companies because people aren’t buying products. If we don’t stabilize this now, we stand the chance of having a depression, not just a recession. Just ask the auto industry. I can’t keep count of the dealerships that have been going out of business around here lately, and Chrysler just announced that it would be laying off 25% of its staff, and is actively looking into a merger with General Motors just to survive.
The reality is that the banks are going to have to write-off some of the value of the homes they financed at exorbitant rates in the last few years. Nobel Prize winning economist Paul Krugman said last March that he thought home values in this country might drop by as much as 7 Trillion Dollars. You can make all kinds of arguments about who needs to pay for this loss from all kinds of angles, but the fact is the banks are going to have to lose some of the value on these properties. The government doesn’t bring in anything like enough money through taxes or bonds to cover these mortgages. This is, in fact, several times the annual GDP of this country, so nobody makes enough money to cover this loss. No reasonable suggestion as to how to deal with this has gotten around this fact. Yes, the government can buy up these loans, but if they buy them at face value, taxpayers are going to be stuck with a whopping big bill that could sink our government.
The best option, then, is for the banks to lose some of the value on the bad loans they made either from greed or stupidity, the homeowner should absorb some of the loss for taking out the loan they never would have been able to pay back anyway, and the government should absorb some of the cost as well. This frees up the maximum amount of capital to allow the economy to recover.
The alternative is to throw the homeowner out into the street, let the bank take the full loss on the loan when they sell the foreclosed property at distressed rates, and watch property tax rates plunge for the local government. Are you ready to watch crime rates soar because the city has to lay-off police officers due to declining property tax revenues? Meaning the former officers can’t make their mortgage payments. Making the economy worse. And so on.
I’m not depressing you, am I?
So, if we don’t take care of the housing mess quickly, we won’t have the ability to deal with the looming corporate credit crunch (which sounds like a name for a candy bar.) We also will not have the capital to do other necessary things, which will be covered later.
Showing posts with label mortgages. Show all posts
Showing posts with label mortgages. Show all posts
Thursday, October 30, 2008
Wednesday, September 24, 2008
A Solution to the Current Financial Meltdown
By Ed Smallwood
Folks-
We’re hearing a lot of talk about the bail-out of the financial companies on Wall Street. Both parties are weighing in, with most people (more than 70% of those polled) skeptical that giving almost a Billion Dollars of money without oversight to one person to dole out to the companies is a terribly good idea. The President and John McCain seem to be okay with it. Republican Representative Joe Barton from Texas (who voted with the President 96% of the time) called the bill “Dead on Arrival,” and stated that the bill “doesn’t have 40 votes in the House,” so someone is listening.
This is my take on the situation:
We are right to be skeptical. The way the bail-out has been architected, the executives of the companies are likely to keep their jobs and fat bonuses. The government will take a chunk of the shares in the company, diluting the value of the remaining shares and shafting the shareholders if the company recovers. It does nothing for the homeowners whose failing loans are causing the financial debacle in the first place. In short: The heck with your retirement or your home. What’s really important is saving rich people’s butts! Understand?
The really huge problem with this is that we are likely to see as much as (possibly more than) Seven Billion Dollars in losses through the mortgage meltdown. That’s Seven Billion Dollars in lost home equity. To put it another way, that’s more than half of the U.S. Gross Domestic Product. Imagine if your gross salary suddenly got divided in half for a year without changing any of your other obligations. That’s what we’re talking about happening to the economy of the U.S. And that’s not counting the amount of money that people put into their home and lost due to the home being foreclosed on.
Now imagine that the current bail-out doesn’t address any of the problems with the mortgage meltdown. Why imagine? It doesn’t. None of this money, not one single cent, is slated to reduce the damage to homeowners’ pockets. All the legislation does is make sure the mortgage company is still there to foreclose on the homes if need be.
Now, keep in mind that while that’s not good, the current bill also does nothing whatsoever to address the bad mortgage making decisions that got us into this problem. Nope, repealing Phil Gramm’s deregulation of the industry is not currently on the table.
So, here’s the deal: Executives keep their jobs, retirement savings invested in mutual funds get smaller, homeowners are out on the street, and taxpayers are left holding the tab. If that isn’t a Bush/McCain field goal, I don’t know one.
Here’s what we need to really be doing:
First, we need to bring back confidence in our financial institutions. Simply making sure that they continue to exist isn’t that helpful if they aren’t doing their jobs. That means they have to be lending money out to people who can afford it and collecting that money accordingly. In order to make sure they are doing their job we absolutely must at a minimum bring back the old regulations by repealing Phil Gramm’s (architect of McCain’s economic policy) deregulation bill. Creating a few new regulations might be useful as well, as long as they prevent this kind of mindless money grab.
However, that is nowhere near enough. We should also have the FDIC and SEC swoop in on banks and mortgage companies after closing on some Fridays for unscheduled audits that would take the entire weekend. Go over these institutions completely and with a fine-toothed comb. Then on the following Monday morning if the company doesn’t pass the audit, the government takes them over. If they do, then the FDIC or SEC should make a nice, loud public statement that the company is financially sound and ready to continue business.
That helps bring back confidence in our financial institutions, but doesn’t help the real backbone of our economy. In order to fix that, we’re going to have to relieve the homeowners of some of their burden. This is going to be hard and involved. My recommendation is to do something similar to the audit of the banks themselves. We’re going to have to freeze foreclosures for a time. Before foreclosing on a property, a financial institution will have to do the following: Attempt to contact the homeowner and offer to meet with them. This should be first attempted through the mail, followed by phone calls, and then home visits if necessary. The mortgage companies would not be able to foreclose on the property if they couldn’t prove that they had done this. If the homeowner agrees to a meeting, then they would meet at a neutral location with the mortgage company and a neutral mediator.
At the meeting, the mortgage company would have to present an honest assessment of the current value of the property, as well as the amount owed on the property. The homeowner would present documents showing their income as well as their financial liabilities. It is likely in many cases that the homeowner would not be able to pay back the entire amount of the loan. It’s probable that in many areas the home could not be sold for more than the loan amount for a decade or more. The mortgage company is going to have to take a loss in these cases. But, we can mitigate the loss if we’re careful. The loan must be restructured so that the payments are affordable and not for less than the reassessed value of the property, but if the homeowner sells for more than the loan’s restructured value for up to some specified time (I would say up to 10 years after the life of the loan would be reasonable), the mortgage company should be entitled to a portion (not most or all) of the profits up to the original value of the loan. This money going to the mortgage company would be used to offset any bailout funds given to the mortgage company by the government, and buy back shares in the company from the government, helping to keep shareholder equity. Any financial institution unwilling to do this should be excluded from bailout funds.
This idea has the merit of helping to free up funds for the homeowners to spend or invest and keep our economy afloat, while protecting shareholder value. However, in order for this plan to work it will have to be heavily promoted. It will do nothing if people don’t know about it. Is this idea perfect? No, it doesn’t really punish those who were greedy enough to get us in this mess. Is it simple? No, but the simple solution was to prevent this problem in the first place (and it was clearly preventable.) However, it is the best we can probably do at this point, and it would probably be enough to prevent a serious recession.
Anyone in Congress who wants to steal this idea and elaborate on it is very much welcome to do so.
Folks-
We’re hearing a lot of talk about the bail-out of the financial companies on Wall Street. Both parties are weighing in, with most people (more than 70% of those polled) skeptical that giving almost a Billion Dollars of money without oversight to one person to dole out to the companies is a terribly good idea. The President and John McCain seem to be okay with it. Republican Representative Joe Barton from Texas (who voted with the President 96% of the time) called the bill “Dead on Arrival,” and stated that the bill “doesn’t have 40 votes in the House,” so someone is listening.
This is my take on the situation:
We are right to be skeptical. The way the bail-out has been architected, the executives of the companies are likely to keep their jobs and fat bonuses. The government will take a chunk of the shares in the company, diluting the value of the remaining shares and shafting the shareholders if the company recovers. It does nothing for the homeowners whose failing loans are causing the financial debacle in the first place. In short: The heck with your retirement or your home. What’s really important is saving rich people’s butts! Understand?
The really huge problem with this is that we are likely to see as much as (possibly more than) Seven Billion Dollars in losses through the mortgage meltdown. That’s Seven Billion Dollars in lost home equity. To put it another way, that’s more than half of the U.S. Gross Domestic Product. Imagine if your gross salary suddenly got divided in half for a year without changing any of your other obligations. That’s what we’re talking about happening to the economy of the U.S. And that’s not counting the amount of money that people put into their home and lost due to the home being foreclosed on.
Now imagine that the current bail-out doesn’t address any of the problems with the mortgage meltdown. Why imagine? It doesn’t. None of this money, not one single cent, is slated to reduce the damage to homeowners’ pockets. All the legislation does is make sure the mortgage company is still there to foreclose on the homes if need be.
Now, keep in mind that while that’s not good, the current bill also does nothing whatsoever to address the bad mortgage making decisions that got us into this problem. Nope, repealing Phil Gramm’s deregulation of the industry is not currently on the table.
So, here’s the deal: Executives keep their jobs, retirement savings invested in mutual funds get smaller, homeowners are out on the street, and taxpayers are left holding the tab. If that isn’t a Bush/McCain field goal, I don’t know one.
Here’s what we need to really be doing:
First, we need to bring back confidence in our financial institutions. Simply making sure that they continue to exist isn’t that helpful if they aren’t doing their jobs. That means they have to be lending money out to people who can afford it and collecting that money accordingly. In order to make sure they are doing their job we absolutely must at a minimum bring back the old regulations by repealing Phil Gramm’s (architect of McCain’s economic policy) deregulation bill. Creating a few new regulations might be useful as well, as long as they prevent this kind of mindless money grab.
However, that is nowhere near enough. We should also have the FDIC and SEC swoop in on banks and mortgage companies after closing on some Fridays for unscheduled audits that would take the entire weekend. Go over these institutions completely and with a fine-toothed comb. Then on the following Monday morning if the company doesn’t pass the audit, the government takes them over. If they do, then the FDIC or SEC should make a nice, loud public statement that the company is financially sound and ready to continue business.
That helps bring back confidence in our financial institutions, but doesn’t help the real backbone of our economy. In order to fix that, we’re going to have to relieve the homeowners of some of their burden. This is going to be hard and involved. My recommendation is to do something similar to the audit of the banks themselves. We’re going to have to freeze foreclosures for a time. Before foreclosing on a property, a financial institution will have to do the following: Attempt to contact the homeowner and offer to meet with them. This should be first attempted through the mail, followed by phone calls, and then home visits if necessary. The mortgage companies would not be able to foreclose on the property if they couldn’t prove that they had done this. If the homeowner agrees to a meeting, then they would meet at a neutral location with the mortgage company and a neutral mediator.
At the meeting, the mortgage company would have to present an honest assessment of the current value of the property, as well as the amount owed on the property. The homeowner would present documents showing their income as well as their financial liabilities. It is likely in many cases that the homeowner would not be able to pay back the entire amount of the loan. It’s probable that in many areas the home could not be sold for more than the loan amount for a decade or more. The mortgage company is going to have to take a loss in these cases. But, we can mitigate the loss if we’re careful. The loan must be restructured so that the payments are affordable and not for less than the reassessed value of the property, but if the homeowner sells for more than the loan’s restructured value for up to some specified time (I would say up to 10 years after the life of the loan would be reasonable), the mortgage company should be entitled to a portion (not most or all) of the profits up to the original value of the loan. This money going to the mortgage company would be used to offset any bailout funds given to the mortgage company by the government, and buy back shares in the company from the government, helping to keep shareholder equity. Any financial institution unwilling to do this should be excluded from bailout funds.
This idea has the merit of helping to free up funds for the homeowners to spend or invest and keep our economy afloat, while protecting shareholder value. However, in order for this plan to work it will have to be heavily promoted. It will do nothing if people don’t know about it. Is this idea perfect? No, it doesn’t really punish those who were greedy enough to get us in this mess. Is it simple? No, but the simple solution was to prevent this problem in the first place (and it was clearly preventable.) However, it is the best we can probably do at this point, and it would probably be enough to prevent a serious recession.
Anyone in Congress who wants to steal this idea and elaborate on it is very much welcome to do so.
Thursday, May 29, 2008
The Political Anchors Dragging Down John McCain
By Ed Smallwood
Senator John McCain has problems. He has been trying to distance himself from an unpopular President in G.W. Bush. He has been trying to convince you that because he is a former POW from the Vietnam War that he is a military supporter. He also wants you to believe that the economy is going well. Each of these issues is weighing him down like anchors around his neck.
It came out recently that former Senator Phil Gramm, who was a lobbyist for UBS, and who lobbied hard for deregulation of the mortgage industry, is a leading economic advisor to Senator John McCain. That’s right; the architect of the current “Mortgage Meltdown” is a senior advisor for Mr. McCain’s economic policy. We’ve already seen what happens when the President’s closest advisors are former industry big-wigs—you get $4 per gallon oil, manipulation of the electricity market in
Right now the Senate and the House of Representatives are in conference to put the finishing touches on a new G.I. Bill that the President has vowed to veto. It would allow veterans to go to college after their service is completed. Many of our Military Servicemen and Servicewomen went into their branches of the service with the understanding that they would get monetary assistance in college as a result of their service to our country. All of the major veteran’s groups have come out in favor of this bill.
John McCain has publicly come out against the new G.I. Bill, in opposition to many of his peers in the Republican Party. He says it will cost too much. I’m not joking. Mr. McCain has said in no uncertain terms that he is not willing to give an education to people who are willing to give their lives for him and us. The cost of the lives of those over 4,000 dead in all of the branches of the military including the National Guard is not enough to make sure the rest get an education. Over 30,000 have been wounded, and that is not payment enough, according to John McCain and G.W. Bush, to make sure they and their compatriots get an education. Mr. McCain says he is afraid that one of the main recruiting tools that the military has, the offer of a free education in exchange for military service, will encourage current military personnel to leave the military instead of spurring more enlistment, and that could make a difference in his 100-year-war. Is that supporting our military?
Relying on industry to give input on how it should be regulated. Giving military support lip service. Allowing the economy to fall into disrepair from neglect. Don’t these all sound like the methodology of G.W. Bush? Can McCain really distance himself from Bush while using these tactics?
More importantly, can we vote for McCain while knowing all of this? For myself, I know that the answer is an emphatic “No!”
Sources:
Military Casualties:
http://www.antiwar.com/casualties/
McCain’s Veteran’s Problems:
http://www.time.com/time/politics/article/0,8599,1808161,00.html?xid=rss-topstories
http://washingtonindependent.com/view/mccains-gi-bill
Sen. Phil Gramm’s lobbying:
http://www.bizjournals.com/phoenix/stories/2008/05/26/daily15.html
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