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Which Credit Card Rewards Does the IRS Care About?Wilbur Ross, the world's most famous buyer of bankrupt companies, who is a sage in his own right, attacked the government''s bank bailout plan. Like Warren Buffett and George Soros, the media hangs on his comments. He has made a billion dollar fortune and is, therefore, considered smarter than most people, whether that is true of not.
Ross has a simple message. Savings banks will do nothing if mortgage-holders are not saved in the process. If the mortgage mess gets worse, banks will continue to have trouble over time, even if the Treasury does put $700 billion into the market.
Ross's comment was straight-forward. He told Reuters that "none of the recent actions to stabilize the financial system addressed the root of the problem -- helping Americans make their mortgage payments."
So, why is the government attacking the crisis from the wrong end of the system? The answer probably is that it is easier to save a small number of banks than it is to salvage hundreds of thousand of mortgages. Renegotiating all of those loans, resetting interest rates, and keeping some homes from foreclosure is simply too difficult a task. Many members of Congress do not view it that way. They want mortgage assistance programs added to the bailout bill.
Not matter what the level of challenge, the federal government has to give banks direct incentives to help the mortgage holder. Nothing can save the economy if hundreds of thousands of more home loans go into default. At that point, the real estate market could collapse and not recover for years.
The $700 billion rescue package would only be a drop in the bucket.
Douglas A. McIntyre is an editor at 247wallst.com.
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Reader Comments (Page 1 of 1)
9-23-2008 @ 11:10AM
Ira Friedman said...
I agree wholeheartedly with Ross' comments. I think that the bailout is needed by the financial institutions and by our economy, but it should go hand in hand with help for the mortgagees.
I think a 2 pronged program should be put in place. Help the financial institutions by buying the underperforming mortgages. But value those mortgages as if they were written with a 30 year payout at a fair rate of interest. And in assessing the principal of those mortgages, remove the penalties and fees that unscrupulous lenders might have attatched to them.
Then, the government, owning these mortgages, should offer every mortgage holder the right to renegotiate the mortgage to a level which would enable them to afford the monthly payment and keep their homes. Principal would stay as the unpaid principal on the original loan, but the terms would be adjusted to keep the mortgagee solvent, insofar as that could be done with a prudent mortgage loan.
If there were no reasonable way to keep the mortgagee solvent, because they really were not able to afford the purchase in the first place, the home should be foreclosed but the mortgagee would have the option to stay in the house as a renter for a year to enable them to find affordable place to live. And maybe a part of their equity should be given back to them. Not everyone who got a mortgage to buy a home was morally entitled to have a home.
The price paid to banks for these mortgages should be calculated on a fairer type of mortgage than the institution originally gave them. The government should also take into account their costs in administering the reworking of these mortgages. Banks should have to hurt with each morgtgage they sell, but if selling these mortgages at low prices is the only way they can survive, then they will have to go along with the program. If they have a better way to survive, let them do so. The bailout should be a course of last resort for the banks, not another government boondogle.
When the banks have sold mortgages at a rock bottom price, they will not need supervision as to overblown executive salaries. If they chose to take geovernment buyouts of mortgages and overpay executives rather than reinvest and lend out the money they have received, let the directors and shareholders do the supervision and throw the bums out. If they don't they suffer the consequences.
Government could come out ahead by then reselling these mortgages once they are adjusted and not in default. But they must sell them only to reponsible lenders who will not restart the melt down process again with their cupidity.
Homeowners will benefit because they will have the opportunity to save their homes. A saved home is a home that does not go on the market in a fire sale. The less homes on the market, the smaller the supply and the higher price they will command.
The financial institutions will benefit because they will have a way out of the mess they created. And they will not be granted immunity from their avarice.
PS. The mortgages that the government works out with those who negotiate it should be 100% assumable, so the houses can more easily be sold in any kind of market, and banks will not be encouraged to charge outlandish fees everytime a house changes hands.
Homeowners who are not part of this deal because they can afford their mortgage payments would not have reason for envy. The renegotiated morgages would have have to be repaid the outstanding principal. They would have no capital from this process.