Monday, January 19, 2009

IMHO- The Financial "Crisis"

Make no mistake, the US is in for some rough financial times. So, how do we get out?

As we have seen, just giving money to the banks won't solve the problem. They're like the MLB owners, they can't control themselves. Sure, the banks y may have more money to "open up the credit market," but that only fixes a small part of the problem. All of the bad debt that was there is still be there. Just giving money to the banks is short sighted and i think just plain lazy. To really fix the problem, we have to get the money flowing back up through the chain: from consumer, to lender, to investors... one big circle.

This means you have to get the bad mortgage performing again. To receive any money from the feds, lenders must agree to modify existing loans on terms that enable homeowners to pay their mortgages. Convert all ARMs to fixed loans and lower ALL rates for everyone. To accomplish this, a portion of the bail out money should be used to modify existing loans. Allow consumers to "cram down" the principal owed to take into account current property values. Use some of the money to compensate lenders for making these changes, not dollar for dollar, maybe 50 cents to the dollar.

To be sure, there will be some consumers who, no matter what you do, won't be able to afford their home. That's o.k. because contrary to what we have been led to believe, not everyone should be a homeowner.

But, many people will be able to keep their homes. Bad debt could become good debt. This then improves a lender's credit rating allowing it to borrow money, which allows it to lend money.

And, homeowners get to stay in their homes.

Consider the alternative. Rising foreclosures, vacant properties etc. Illinois has experienced an 80% increase in 2008. In Cook County alone, there were over 45,000 foreclosure cases filed. Think about that number for a second. 45,000. Since many social services are paid from property taxes, it is in no ones interest to have all of these properties vacant and the loans unpaid.

No comments: