Is the Obama housing bailout a good idea?
First what is it? I heard it's a plan to incentivize loan rate reductions, half a % to be paid by the bank and half a % + the documentation fees paid by the government. Clearly this plan will "work" in that it will have takers. People want to refinance (heck, I did) so if it gets easier to do so, more will. If the Govt were to just pay the 1/2%, I would expect market forces would drive housing interest rates down that much, right? It is a little hard to see how the bank is motivated to kick in thier 1/2%. Maybe I'm missing something? (There are other disjoint parts of the plan, but I want to think just about this single factor for a bit.)
Also, I had a little bit of "isn't this how we got into this mess?" reaction to the plan. The lower the interest rate, the more you can borrow. But maybe the problem isn't the principal but rather the fixed expense the loan introduces into the family's budget. People need to get themselves into less trouble, by aiming lower, not accepting high payments. Maybe the loan criteria should be stricter: payments =20% of monthly income, instead of 30%. THAT way you'd be giving out loans with less risk, right? More later, sorry for the half baked thought.
Also, how can we enforce bank participation? They're supposed to contribute 1/2% but in the ongoing re-evaluation of market demand and setting loan rates so they can cover their risks and make a profit, it seems the 1/2% will just vanish in the bookkeeping.
Finally, lets remember, as a transition to and motivation for my proposal (following) that this is essentially America (meaning you and me) taking on additional debt liability in the form of T-bills, to pay for somebody else's mortgage. I think the guys who got in too deep should participate personally in the solution. Here's how:
Consider solving the problem by lowering everybody's payment 10%, and extending their loan commennsurately in duration. It would immediately alleviate the homeowner's cash crunch, and shouldn't cost us (taxpayers) anything other than the additional risk of covering the defaulters. Of course there would be some of that, but this does not amount to a free giveaway, so it's a tiny fraction of the loss. How could it work? Well, this thought stemmed from a discussion about the spread between Tbills and home loans. Currently I understand that to be about 5%. I pay 5% for my home loan (about the best you can get) and I heard our debt is being snapped up for ZERO percent interest right now. Parenthetically, that means that in these hard times, US currency is still viewed by the rest ofthe world as a great deal. Why is that spread so big? Hey, I wannna sell a T-bill to china for 0% and finance my house for nothing! Where does the money go? The answer is middlemen's profits (salaries for the bankers) and to cover the risk of defaulting. Well, let's eliminate the middlemen and since we (the Govt) are forced to cover this risk anyway, let's not let somebody ELSE (the bank) book it as risk and bank it as profit. Essentially we are self insuring, for better or worse, across the spectrum of these loans.
Mechanically it works like this: Say you're in a dire cash crunch annd considering bankruptcy and defaulting on your house loan. You'd have an option where the government pays off 10% of your principal, and your payment drops about the same amount. I'll add some specific numerical examples later. You don't get the money for free though, it's a loan from America, a second lien on your house. When you finish paying off your home loan, your govt subsidy loan comes due, and you start paying that. All the while it's been accruing at the same low rate (ZERO!) the government had to pay to borrow the money from China. Maybe we can even add a point or two: it will still be a great deal (compared to a 5% bank loan) and, while you have to work longer to get out from under your house, so to, do I, to pay off all the additional debt the nation is incurring to fund Chrysler's bailouot, and Citibank's bailout and etc. This is an appropriate shared liability.
Further, anybody could take advantage of it. Heck I might! Since I can make my present house payment, the reduced principal would let me pay the house down faster, and I'd finish off the whole loan with less total outlay. It's like my house got busted into two loans, one still at 5% and the other fraction of the principal at 0%! Of course I pay off the expensive one first. Good deal for everybody.
Some security strings could be attached to this funding. Since a key problem is our propensity to get too deep in debt, perhaps in exchange for access to this money, you must agree not to increase your debt to income ratio. So you can't take the extra $100/month and run out and get a car (loan). The idea here is to become more like the Chinese and LESS like, well, ourselves!
What do you say?
