So, Jon Stewart floats this option every time anyone remotely connected to the economy is on his show, and I have yet to hear one of them argue why it can't be done. Nobody has put forward a reason why his option would be worse than any of the other options we've heard.
Here's Stewart's idea in a nutshell, then I'll add my own brilliant flourishes (make it shiny!):
- The insurance companies (like AIG) are in trouble, because they have insured these loans that just aren't going to get paid back, and they can't afford to cover the banks' losses;
- The banks are in trouble because they have all of these loans on their books that aren't going to get paid back, and so their actual capital is less than what they need to be able to loan money out like they're supposed to;
- The homeowners are in trouble because they have these mortgages they can't pay back because they were stupid/gullible/greedy/whatever and were lured into taking out mortgages that they couldn't afford (and shouldn't have been approved for).
So far, our solution has been to give money to the insurance companies and banks: Now the insurance companies can cover the losses they've insured at the banks, and the banks can start lending money again. Homeowners... well, sorry, you're screwed... but you should have known better!
The problem is that the insurance companies and the banks aren't taking the money and using it to fix the economy, they're taking it and awarding themselves crazy bonuses, throwing lavish events, and not putting the money back into circulation in the form of loans, etc. So the economy is not moving forward, and our tax dollars are disappearing.
Jon Stewart thinks it's time to give the 3rd party in the debacle a chance to show us what they'll do with the money. Why not give the bailout money to the homeowners so they can pay off their mortgages? Then, the toxic assets aren't toxic anymore, banks balance books look like they're supposed to (provided they don't start making stupid loans again), AIG et. al. don't have to cover the losses on those loans because they're not losses anymore... problem solved, right?
Those are the pros, what are the cons?
1) Well, do homeowners who took risks they should have known better than taking be bailed out by the goverment? Is that fair to others who either continue to make their payments, or to others who didn't buy a home because they knew that they couldn't really afford it?
2) If we just give money to them, how do we know they'll use it responsibly to pay down their debt? What if they waste it on frivolous spending?
It's funny, because the cons of giving the money to the homeowners are the same as the ocns we've seen fleshed out in gory detail for the banks and insurance giants. So what if we can structure a bailout of homeowners that takes some of our experience with the financial institutions into account?
Right now, we own part of AIG and several banks as taxpayers. I'm not interested in owning those companies, I'd rather own houses! What if the government buys houses from people who are stuck in houses that they're in danger of defaulting on? Here are some ideas to make this work:
1) The government will buy any home that is in danger of foreclosure under certain conditions. Some conditions might have to do with when the loans originated, the payment history before interest was reset for ARMs, the percentage of equity versus the current appraised value of the property, etc.
2) The government will pay a price that covers the payoff amount of the mortgage, plus a percentage of the equity based on some formula that takes the aforementioned conditions into account. The payoff money for the mortgage does not go to the homeowner, but directly to the lending institution, releasing the title to the government. The balance goes to the homeowner in exchange for releasing the title to the government.
3) The government then immediately puts the home on the market, using a formula for the price that takes into account the price paid for the home and the current appraised value for the home. Any financial institution that wants to handle the mortgage for these government sales must choose from a limited number of options, like fixed-rate 30-year notes with minimal interest rates. It might even be an option to offer 40 or 50 year notes to qualifying buyers.
4) Current occupants of the home can be given the first opportunity to apply for the new loan and buy the house back from the government. If they apply (with realistic qualifications), they don't have to move out of the house and then move back in. They don't get the house for free, they get a restructured loan with government assistance.
So, the loans are no longer toxic, just a little bit nauseating. The banks exchange theoretical assetts and interest income that they'll never get back for a less amazing looking return, but a return they will actually receive. The government intervenes to make sure that the bank recoups its initial investment plus interest, though the interest is less amazing than they thought they could get in their pre-bubble-burst fantasy world.
Insurers don't need to save the banks, therefore they don't need government assistance, therefore they can use their own money to pay out bonuses and throw lavish to-dos.
Homeowners don't get a free house from the government, they just get another chance to pay off their debt with restructured loans that are more realistic. People who waited and didn't buy a home with crazy, unrealistic rates now have a chance to buy a house with reasonable rates that will stay reasonable from the government from those homeowners who really shouldn't have even tried, and who lose their homes but don't end up hopelessly in debt.
Why not? There's lots of cons, but I posit that the downside is less dreary than the current system of propping up the financial institutions directly. They've shown they can't be trusted to be responsible with our money. I'm all for giving the little guys a chance to disappoint us. We might be pleasantly surprised...
- "Now begone, before somebody drops a house on you!"
Tuesday, March 17, 2009
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