On The Morgage Crises

Proposal:
    The United States government should refinances mortgages for quality homeowners that are struggling or failing to make their mortgage payments. By extending the mortgages, the monthly payments can be reduced. This should be done in a matter that does not force banks to make write offs or suffer undue consequences. Instead, the government should pay a portion of the morgage owner's mortgage every month, in the present, while recovering the costs of the loan (with interest) through the extended lifespan of the mortgage.

Recent News:
    been set aside to deal with the mortgage crises was increased to a total of $0.9 trillion. One of four conditions Obama urged the Treasury to follow was that the money must be used, was that the money be used to aid home owners who are about to have their homes foreclose on them. As far as I can see, there have not been any concrete proposals as to how this money would be used in a manner that is both fair and effective.

Brief Analysis:
    It is my intention to demonstrate that the proposal is fair, effective and viable. To begin, we need to define fairness. Rewarding failure or poor decision making is a moral hazard, and considered unfair, while at the same time bankers should not be punished for being greedy. Agents acting out of their own best interests are doing exactly what they are expected to do, it is difficult to argue that this is worthy of punishment. The true fault lies in the system itself and those that are charged with its maintenance.
    When the systemic failure of the mortgage industry took place, a large number of homes were foreclosed because homeowners couldn't make their payments. Usually, banks would use the homes they had as collateral as a means of recouping their losses. However, when the supply of houses on the housing market sky rocketed, the price of homes plummeted and the banks were forced to write off the value of the houses and take significant losses. This lead to a repetitive cycle when the banks laid off workers, or sold off positions in the stock market to balance their books. This of course spread the losses to other industries with investment portfolios and created a feedback loop.
    In order to break this feedback loop, the rate at which houses go on sale needs to be brought back under control. The proposed idea would accomplish this by reducing the number of homes that get foreclosed. Further, by providing banks and home owners incentive, the participation of both parties can be guaranteed. Of course, it wouldn't be fair if neither guilty party suffered the consequences, which is why banks that wish to take part in such a transactions should forgo their collateral (the actual property) to the government and take a hit on the profit they would have made if their clients had not failed to make their payments. So banks that made the bad loans loose some profit, and homeowners that failed to met their obligations are forced to delay the day when they would own their own home, in addition to paying more interest in the long term.
    In terms of viability, the banks have a vested interested in taking part in such a program since they can turn a situation that is a loss into a small/medium profit. Further, by taking advantage of such a system they can relieve the selling pressure on the housing market and recoup more of their losses from the smaller number of homes they do foreclose on (because the owners have no viable method of paying even a reduced mortgage offered by such a plan). Homeowners benefit as well by seeing their property values slow down the rate at which they are falling, and are provided a lower monthly mortgage rate. Since most people will never own a home in their life span (consider how many people over 40 have more than 25 year mortgages), this is not the worst punishment. Since all parties that would need to be convinced have something to gain from the proposal, the viability of the proposal is pretty high -- all affected parties should gladly participate.
      The last characteristic of the proposal I wanted to demonstrate was effectiveness. As mentioned above, the proposal has built-in incentives for all parties involved, the bad-lenders, bad-debt holders and the tax payer. As a result, adoption should be high and the program, since it has a neutral or slightly positive return to taxpayers in the long run adoption should follow.

Side Note:
     I love Jon Stewart's program; however, recently he's been promoting the idea of buying back consumer debt as an alternative to injecting cash into banks. Although this sounds good at first, when you factor in the expected returns banks have already priced in on loans that were unlikely to be paid in full in the near future, banks will have to take a loss in accepting early pay offs of debt. Further, this unfairly punishes the taxpaying members of society who are debt free.

Disclosure:
    I do not have stock in any banking firms. I do however, own RIMM, APPL and GOOG, while the majority of my position lies in SPY against which I sell covered calls.

References:
   - Jon Stewart's views on repurchasing consumer debt.