Snowball effect to the stock market

Mar.07, 2008 in Market Outlook

I’m not one that believes the government should come to the rescue to big banks. But on the other hand many families have gotten caught up in this mortgage mess that will have a snowball effect. The fed’s allowed banks to borrow to people that could potential default. Basically they relaxed the policies of 20% down. In order to get out of this mess I believe the government should buyout these troubled mortgages from theses banks at a 10% fee and renagociate these homeowers mortgages at the going rate for 30 or 40 year loans. Making it clear to these homeowners if they default again they will face stiff penalties including garnishment of wages.

The additional problem homeowners are facing is that the feds continue to lower rates and the banks continue to raise the 30 year fixed trying to recoup losses and knowing that homeowers that have the arm will pay this higher rate. The feds need to state to the banks that they need to match the fed. When the fed lowers the rate by one point than the banks need to lower the rate by one point. The feds need to threaten the banks where it hurts their pocket book for example the current fed borrowing rate is 3% if the banks arent willing to give the homeowers 5% rate then the federal government will give the homeower a 4% rate for their 30 year fixed. I garranty every bank will line up and correct their rates and the mortgage crisis will end. It can’t end by continued fed cute when the banks continue to raise rates.

If these big banks were racehorses they would have been put down on the track a long time ago. You also see the public policy nightmare associated with this mortgage/banking meltdown: the very real possibility of KOA campgrounds becoming the 51st state. The “under water” and ARM reset numbers are staggering; these people walk and they will stay wherever they can hang their hat. There’s simply not enough rental units out there for millions of people who walk away from their mortgage; campgrounds and state parks are only viable 7 months of the year in cooler climates.

Heading this off would first require a writedown of the principal on the mortgage; writing down the security tied to it says the full amount of principal and interest will never be realized. Many of the valuations which the mortgages were based on were suspect at best to begin with. Extending the terms and locking up a lower rate would be critical. The bankruptcy courts are best equipped to deal with this because they require the very same documentation which Paulson and Bush require for their Hail Mary programs; the borrower would also have full protection under the law by having the bankruptcy courts manage this. The bankruptcy judge may have the power to force a “cram down” on the lender. They can accept the court’s terms or it turns over to the feds, with the lender paying the borrower’s court and legal costs plus a penalty. Banks will choose to play commodities for 2% a day over 2% a year on a mortgage.

Garnishment is useless on a second default; if state law calls for a lower garnishment percentage than federal, state takes precedence. Even this can be excluded on hardship grounds. There’s also nothing to stop the borrower from crossing state lines. Feds have to file suit to garnish and transferring judgment is not cheap. There are plenty of temp agencies out there who will pay the borrower cash money by the day so he can fly below radar almost indefinitely; when was the last time anyone used his real name to work for a temp agency anyway?

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