Paulson - Bernanke Bailout Plan Doomed to Fail!
Posted 8 weeks 2 days ago byI I listened to the testimony of both Paulson and Bernanke today before congress. They actually proved what I have been saying for the last two years as to what the cause of the problem which is killing the majority economy right now.
However, the solution is doomed to fail. The reason why its doomed to fail came in the testimony of Cox and Lockhart portion of the hearing. As I have stated over and over again, the lenders and banks have an unregulated by the government which even all of the people say is a fraud deal going on in how the lenders and banks conduct the sale of these homes at auction along with how they actually deal with the morgages in general.
The reason why the plan is doomed to fail is because Paulson's plan is to try and regulate how the banks and lenders in how they conduct business before foreclosure. It does not prevent the problem from happening again. All of the men, Paulson, Bernanke, Cox and Lockhart all said that the core problem has to be reformed. But they do not suggest going as far as prevention of the lenders from buying the notes which they have held but rather suggest that there be some regulation in how its done in the future.
Why all this is doomed to fail is because when you have the lender having the power to control the contract for the note on the morgage and how its to be paid back along with having the foreclosure powers over the borrower is in its self not a problem. What is the problem is that the lenders also can buy the note that is up foreclosed on for the specific purpose of prevention of short sale to engage in speculation that the property that they buy back will gather at least the maturity value if not greater than the maturity value. The problem is that when banks can control the contract and the conditions for foreclosure there is a conflict of interest when the same lender can purchase the property at auction for the desired purpose of holding that property until it achieves at least the maturity value or greater. Thus it eats up the capital of the lenders which are subject to valuation of the actual market price of the property until the property sells.
As both Cox and Lockhart testified that more than 80% of the morgages or morage related currently held by the lenders are of this type. Which brings up the last issue of why this is doomed to fail.
Paulson, Bernanke, Cox and Lockhart used the term morgage related and Direct Morgage effect. What do those term actually mean. Let me give a specific example to point this out.
A direct morgage is a note that a bank holds which has not as of yet gone into foreclosure but is in default by the borrower.
Morgage related is property held by the banks which has been bought by the banks at their own auction.
An example of how this worked and how it actually brought down the economy. Consider this as economics 101 on morgage collapse in the banking industry.
A borrower applied for a morgage to a bank, The actual risk of the borrow in this example is unimportant and actually does not matter. A person with a 800 credit rating or a person with a 400 would fare the same in this example. The banks set up special perks for a variable rate morgage which offered great benefits to the borrower on the short haul. The banks which use this type of morgage is unregulated as Paulson, Bernanke, Cox and Lockhart all stated in their testimony before congress and not subject to oversight currently. The banks then raised the variable rates to the point that no borrower can make the payment on the morgage. So both the 800 credit rated person defaults just as the person with the 400 credit rating.
The banks then foreclose and buy the property at auction. This is called swapping and they used several other terms. The problem is that these swapping is applied to the foreclosed amount held by the lenders which again is unregulated. The banks then hold the property in the real estate market until it gets a set market value called maturity value set by the banks themselves as to what they want to sell the house for on the open market.
So you have a home that was worth for example $100,000. The borrrower paid on the morgage until he defaulted. The default balance amount is $60,000. The banks out bid everyone at auction and say paid $105,000 for the house. They then list the amount in swap to the Fed in the amount of $165,000. They collect on FHA or HUD for the balance of the defaulted amount of $60,000 but still show a loss of a short because of the swap of $105,000 which the bank used against its capital holding with a set price of $120,000 maturity rate.
As you can see, the banks stand to make a good deal of money with this scheme which everyone calls a Fraud and wrong. The problem is that the rise in housing led to a slow down in the housing market. With banks using up greater than 80% of their capital in these deal caused the maturity value to fall into what is known as the firesale value. The house that the banks held and are on the hook for is $105,000. But the house real value on the market fell to $70,000. Thus banks have to reduce the amount of Capital they are required to have.
Eventually, the banks loose the capital and they have no cash on hand to loan to anyone.
The housing market by design collapses and there is no way by design to prevent more foreclosures.
What this example shows is the lenders are using foreclosures as a method of speculation in the real estate market. Additionally, under the Paulson and Bernanke plan can not prevent this from happening again one year from now 5 years from now or 10 years from now. Its just a matter of time before it happens again. This is exactly how the S&Ls collapsed by the way with their variable rate morgages. The changes made back in the late 1980s was to increase the numbers of borrowers and loosen up some regulations. All it did was delay the collapse again some 20 years later.
We will see this again if Congress does not shut down the primary reason for the collapse in the first place.
Lenders having the ability to control the note, foreclose on the note and buy the property of the borrower had. Thus you have banks acting in a dishonest manner in an unregulated market to gain access to property.
The best way to shut this down forever is to prevent any lender from buying property which they held at any time over the borrower.
If this simple solution was put into the Paulson and Bernanke plan, it would work. Without it, the plan fails.
Its really that simply!
Thoughts
I need to add more information as I skimed to fast
Submitted on September 25th, 2008 by PabloI need to add more information as I skimed to fast is the previous example. I tried to keep it as simply as I could on a subject that is some what complex which has 32 years worth of bad mistakes and judgment from the people in Washington D.C.
What I failed to note in the above example, is that banks sell their speculations in stock market as bundles to raise short cap capital to cover the period of time when the banks bought the property and when the house sells.
Additionally, Banks may also on the same property have another market speculation on the original loan which was sold in a bundle for the same purpose to cover the money paid out for the loan until the loan gets repaid. These speculations are long term items and were treated prior to President Carter's stupidity or massive idiocy on this subject as a commodity or more or less like a anuity fund in the past. But today its treated as a short term direct stock speculation.
This is because President Carter pushed to allow the lenders of morgages to buy the property which they controled at auction and also allowed for the lenders to bundle the costs of the purchases of those homes bought at foreclosure or bankruptcies into the stock market like a small cap investment which the government guarantees on some portions of those bundles which were VA, HUD or FHA original. In fact, the FED allows for more than those three under additional exceptions which Clinton put into place to allow for loans to people regardless of their risk of repayment so that the lenders could have an increased number of people to buy homes because the scheme put into place by Carter made it extremely profitable in this regard when he changed the rules and allowed for lenders to act fraudulently where there is no regulation or oversight because Carter said regulation and oversight was not necessary and that the banks could police their own.
Thus the lenders bundled those off without regard as to risk as the lenders did not by the stupidity of the Carter administration consider disclosure as to they risk level of those items bundled. So you have companies buying into these bundles with their eyes stary eyed because of the high rate of return and a promise of government security.
There is two types of bundles which Cox and Lockhart went into detail about and also talked about how this crisis has its roots and was the same as the old S&L bailout. They did not use the term S&L but they did say that this was the same problem that happened 20 years ago which would be the late 1980s. Thus they were referring to the Morgage crisis which sank the S&Ls.
No matter how you slice this up. If you prevent the lenders from owning the property which they controled over the borrower, it automatically prevents 2 things.
It prevents real estate speculation by the lenders to target certain markets where interest rates are more than in depressed areas. It also eliminates the Bundling to be applied into the stock market. It also does not benefit the banks to give out loans without regard to actual risk because the banks would have a real risk of loss which they would be accountable for.
Currently, the lenders do not care about risk because they stand to make a significant profit as long as there is a steady stream of people wanting to borrow.
However, when the housing market rose to fast and the homes became to expensive for most people, the number of borrowers dropped and it caused the lenders to lose position on their regulated Capital. Thus to meet regulations to insure that they have enough money to cover deposits it left the lenders without enough money for their credit side. Thus the lenders had no money to lend.
Some banks or other lenders raided other non deposit funds, like 401k, or retirement accounts. GM and Ford are the worst in this regard. GM morgage branch is DITech just in case you did not know. Ford Motor Credit for morgages is ABN AMRO Morgage group. Ford also has another one called AAMG perferred which they opened to get an even bigger piece of the pie through this morgage scheme that has now collapsed.
They are not alone and there are many companies who got into this act because the returns in this scheme was tremendous while they devastated main street USA and the number of forclosures and Bankruptcies increased because of it. Eventually it hit a tipping point in late 2006 where the numbers are exponential of the people who are losing their homes. Eventually Everyone who is not wealthy will have defaulted and no one will be left because no one will be able to borrow to get a loan.
Another item that should be put into regulation is that Banks should make an attempt to redo to the morgage from a variable rate one to a fixed rate that is regulated by the FED for borrower who have the means to make payments but need a stable interest rate.
Another solution would be to eliminate variable rate morgages in conjunction of prevention of lenders being able to buy property that they controled as the lender over the borrower. Thus prevents fraud and it also prevents Banks from working to force people out of their homes in markets where the price of property is on the rise or going outrageous in price. This prevents lenders from looking at the possibility of manipulating the loans or the contracts to get those properties as a means of speculative returns which often are greater than the original value of the notes maturity value.
Thus, Paulson's and Bernanke's plan will fail unless three things are really changed.
1. Lenders can not buy property that they controled anywhere down the line. Lenders can sell the notes to other institutions who want to carry the long term maturity value, but it prevents speculation and fraud to take a borrower's property though dihonest means of manipulation of the note when so that the lenders can get a property which may have a real value significantly greater than the maturity value.
2. Eliminate variable rate morgage loans as they create uncertainty and prevents catastrophic burdens on the borrowers should their be a crisis in the economy in general. Fixed rates are good enough. If a person wants a lower rate, they can redo the notes when the rates fall which is commonly done all the time and has been done for 142 years that I am aware of.
3. Make the lenders attempt a redo of the note to lower monthly payments rather than direct forclosure or forced bankruptcies. This can be done in extending the payout period. An example would be a borrower had a 20 year note and paid on the note for say 5 years. The lender can change the note from a 20 year one to a 25 or 30 year note. In cases of elderly person or age is an issue that they may reasonably die before note is repaid, the lenders may require insurance against disability and or death of the borrower. This would by itself reduce the morgage payments up to half from the original as long as the borrower has the ability to make the payments in accordance to standard lending regulations.
Additionally, make all lenders sale all the property that they bought from foreclosure or bankruptcy at auction. Then offer to bailout the difference. The taxpayers of this country should not have to bailout the lenders for all their red only to have the same said lenders get to keep the properties where they may make a profit.
Its not right for the US Taxpayers who suffered by the lenders where they forced some 70 million people out of their homes over the last 5 years alone and they get to make a profit while the taxpayer gets the shaft.
Make the lenders either sale the properties at auction or surrender the properties to the government where the government then sales the properties where 100% of the sale of the properties goes back to the government and none of the money goes to the lenders who needed bailout.
That is what is needed. It is irresponsible for the government to bailout the lenders where they stand to make a profit while the taxpayer may have to cough up as much as 100 Trillion dollars. The current estimate just from Fanny and Freddy and AIG is 58 trillion dollars. There is a list of some 220 or so other companies which are in the same boat as Fanny, Freddy and AIG. Paulson and Bernanke admitted that the possible amount that the taxpayer could be on the hook for could reach 2 times that of those three but they insist that its going to be less than 700 billion based only on their word with no facts.
Its just not good enough in my book!