A Unique Plan to Stop the Financial, Economic and Housing Crises
by Dan Stephens (modified plan originally conceived in early 2008)
Introduction and Summary below
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The AllStreets Bailout Plan in a Nutshell
The AllStreets Bailout Plan has five main parts:
1. Temporarily suspend foreclosures to give new programs a chance to work, say for one year.
2. By government fiat modify the dangerous, damaging, usurious terms of existing subprime ARMs to more reasonable terms similar to FHA loans; credit the principal with any usurious interest charged since the first rate adjustment. Reset payments to reflect the new interest rates and any principal adjustments. Force credit bureaus to expunge credit histories of mortgage lates or foreclosures that were solely the result of adjusting interest rates of subprime ARMs.
3. A program of Housing and Economic Recovery Certificates (HERCs), one issued for every one to four-unit residential property, equal in value to 60% of the drop in the property value from the peak in 2006, minimum value $5,000, totaling about $2.8 trillion in HERC value. In addition, for fairness to those who don't own a property, one issued to every adult American citizen who has a social security number, but doesn't own a property, equal in value to 10% of the median home value in the area the citizen resides, minimum value $5,000, totaling about $1.9 trillion in HERC value. Providing equal access to the federal loan program for both property owners and non-owners is the only fair way to benefit all adult American citizens. Each HERC can be converted to a low-interest (3%), long-term (30-year) government loan by submitting it to a commercial lender, for one of the following purposes:
A. If a property has a mortgage, the associated HERC must be used to pay down an existing mortgage on a property, replacing it with two 30-year 3% fixed-rate federal loans, half the amount for the lender and half for the borrower. The federal loans are not secured by the property. There is no qualifying for the loans. The net effect of this part of the program is to replace about $1.9 trillion of mortgage debt, or about 15% of the total, with the government loans not secured by the property. The two loans on each property will equal 60% of the drop in value of the property from 2006. That will free most homeowners to refinance or sell without a loss, provide lots of liquid capital on lender balance sheets, restore net worth on lender balance sheets and restore the values of mortgage debt securities held by investors. It won't save every borrower or every loan, but it will fix most of the problems in the housing market.
B. For those who don't have any mortgage, or don't own any property, a HERC can be used to replace credit card debt with a federal loan, or provide low-interest second mortgage money to purchase a residential property, or to provide financing for a licensed business (with recourse to the individual), or,
C. Convert to a personal unsecured loan, but for only half the value when exercised during the first year of the program, or for full value after that.
4. Provide intermediate term loans to states to partly offset their large deficits caused by dropping sales and property tax revenue.
The maximum total value of all HERCs would be about $4.7 trillion, of which a large portion could come from or replace the $10+ trillion of lending funds and loan guarantees already committed by the federal government for various bailout and economic stimulus purposes. $10 trillion is enough to pay off 82% of the $12.2 trillion in total residential mortgage debt, but isn't authorized to pay off hardly any mortgage debt at all!!. Furthermore, the taxpayers who aren't relieved of any mortgage debt get to pay the ultimate bill for the bailed out lenders and investors who still have the taxpayers loans! The AllStreets Bailout will not increase the deficit at all. The loans will be earning assets on the books of the federal government, not liabilities as created by spending and bad bailout loans or other expenses of a long recession. The government will most likely make money on the plan when you consider loan repayments plus interest and net out the inevitable small percentage of defaults.
Some additional details are provided below, and even more detail is provide in our blog http://www.themortgagenews.net. Following is a general discussion of why the bailout is needed and what it provides.
If you think The AllStreets Bailout Plan is the best economic rescue plan you know about, please build support with your contacts, and let your support be known to your U.S. Representative, Senators and the President (sse our pre-written e-mail message on our Links page). Better yet, please donate to support our effort to publicize and build public support for the plan (see the "donate" button on the right sidebar of the home page). If the plan is implemented, you'll receive hundreds or thousands times your donation in financial benefits, as well as help the country avoid a depression.
Not Just Wall Street Bailout, Not Just Main Street Bailout, but AllStreets Bailout
The list of "Streets" that are now in big trouble as a result of the multi-faceted housing, financial and economic crises, in addition to Wall Street, includes Bank Street (any type of lender), State Street (state, county and local governments), and Main Street (including private individual borrowers and businesses of all sizes, including the auto giants). So, a large scale federal government bailout program properly designed to be both effective and fair should be directed to all of the "Streets" simultaneously. But, for the program to be fair, it should provide equal opportunites for all, both citizens in financial trouble and those who aren't. The plan we propose is intended to bail out all economic sectors at once, so we've dubbed it the "All Streets" Bailout Plan. It also benefits those who don't need bailing out, and by doing so, provides large scale general economic stimulus that will also help housing.
What's the Main Problem with Banking and the Economy? The drop in housing values since late 2006, now about 20% for the median home in large metroplitan areas, has left banks holding trillions of dollars of losses on mortgages, especially home equity loans, but also on certain types of first lien mortage loans such as subprime ARMs and option ARMs. It has also wiped out much or all net worth of mortgage insurers and investors in mortgage securities. Many homeowners have been devastated; almost 25% of all residential property owners now have zero or negative equity in their properties. They can't sell without a loss or refinance (however, the new housing rescue plan reportedly will allow a few borrowers who have loans up to 105% of their current home value to refinance, but only if they have conforming loans held or insured by Fannie Mae or Freddie Mac). Many upside down homeowners have begun to walk away from their mortgages and hand the keys to their lender. In addition borrowers are defaulting due to interest rate adjustments on subprime ARMs, unemployment and health care costs.
The actual and prospective losses to banks and mortgage insurers due to the conditions in the housing market, and to other lenders due to the resulting economic downturn has significantly frozen many credit markets and damaged stock markets. Consumers who are locked into bad loans or negative equity have cut back spending on everything. Business are understandably reluctant to invest and are shedding jobs. It's going to take a major investment of the federal government properly targeted to reduce excess consumer mortgage debt to solve the problem for all economic sectors. Neither the economic stimulus program passed by Congress in January, 2009, nor the new housing plan announced by the Treasury are going to do much of anything to correct the main problems.
Lenders No Longer Lending for Most Purposes
There were 2.3 million foreclosures in 2008, and some analysts expect at least 3 million more in 2009. Currently there are 10,000 new foreclosure filings every month, or one every 13 seconds. As that continues to happen lenders face more loss write offs. They forsee more problems ahead, and not just for mortgages, but for credit cards, car loans and commercial loans as the economy sinks. The current damaged state of lender balance sheets, and fear of further losses, has caused them to cease writing most types of loans, except the lowest risk loans to the very best qualified borrowers, or loans that can be easily sold to investors, such as mortgages that can be sold to Fannie Mae or Freddie Mac, or or mortgages with FHA or VA insurance. Traditionally much lending activity in the economy had depended on financing from investors in large collateralized debt securities, and those markets are nearly frozen. Non-mortgage borrowers are having extreme difficulty rolling over short term loans, paralyzing much economic activity and causing many business bankruptcies, not to mention problems with local government financing.
Failed Efforts...Wrong Approaches...Top Down Solutions Won't Work
Financial and economic experts and lawmakers know the problems, apparently they just haven't figured out the right way to fix the crisis. Government efforts to date have not restored non-mortgage lending to a normal state, nor stopped the plunge in housing values. So far the main efforts have been various "emergency" Wall Street bailouts to maintain some liquidity for certain types of debt financing markets, and to restore lost capital to lenders and certain critical buisnesses, including the auto companies, auto finance companies and AIG Insurance Company. The emergency liquidity measures involve lending from the Federal Reserve Bank, the FDIC or the U.S. Treasury, including the TARP funds. Capital restoration has been undertaken mainly by using TARP funds to purchase convertible preferred stock from lenders.
Unfortunately those specialized government programs, directed only to lenders and mortgage investors, do nothing whatsoever to relieve the underlying problematic mortgage debt of homeowners or to improve home values, so the underlying bad mortgage loans remain on the books of the lenders. They are all top-down, trickle-down solutions won't work to solve the unique problems in the economy. It's the consumers who most urgently need the government lending, not the lenders and debt investors. In addition, the Wall Street bailouts are unfair to lenders who don't get the funds, and unfair to taxpayers who get no direct benefits or debt relief.
There have been precious few special government programs directed specifically toward mortgage problems or housing demand. The FHA Secure program was supposed to provide temporary access to FHA loans for those who have jumbo loans. Unfortunately, too many of those borrowers became upside down before they could refinance, so they can't use the program. The most expensive homes have fallen in value the most and more become upside down every day. The Hope for Homeowners program passed last October was supposed to help 400,000 upside down borrowers reduce mortage principal and payments with specially created FHA loans, but through December, 2008 only 25 refinances had been done under the program. It's voluntary, and lenders don't want to use it mainly due to the large writeoffs of loan involved.
In general, so far Congress has relied entirely on voluntary lender programs to modify mortgages, especially subprime ARMs, instead of using its power to directly modify the loans by law. Congress considered but was disuaded from doing anything by statute by The Hope Now Alliance of lenders and mortgage servicers. But private loan modifications have been a dismal failure. Loans modified through December, 2008 have shown a 53% default rate, and it's no wonder, since 47% of the modifications actually increased the borrowers payments instead of decreasing them!!
The economic stimulus plan passed by Congress doesn't do anything significant to fix the central mortgage and housing problems. The new tax credit for purchases of homes by first time homebuyers is a help, but that still doesn't address the central critical problem of excess mortgage debt.
The new housing rescue programs just announced by the Obama administration will do very little to solve the main problem (see the article on our blog "Homeowner Affordability and Stability Plan"). It will not reduce any mortgage debt, and it will only reduce payments for a small minority of homeowners having trouble. A much more comprehensive program is needed to reduce mortgage principal and reduce payments, not just to reduce payments alone.
Large Scale Direct Government Lending Needed
As Presdent Obama has pointed out, the crisis is so severe that only the federal government has sufficient power and resources to stop the monumental economic collapse now in progress. It's unfortunate that the country has gotten into a position where only massive government intervention into the economy can prevent a depression, but that's exactly where it's at, and the sooner Congress or the President acts, the better. The need for strong effectrive action is extremely urgent, since the ongoing foreclosures and bankruptcies of individuals and businesses are creating irreversible, long-lasting damage to the individuals, the businesses, the lenders, housing and the economy. The intervention needs to be not only quick and effective, but fair to all Americans. As many now recognize, an effective and fair bailout cannot and should not be for "Wall Street" alone. Actually, if "Main Street" were to be bailed out broadly and fairly first, then Wall Street would naturally follow in short order. Wall Street really isn't the big problem, it's the big symptom.
Government Lending, Not Borrowing and Spending
The most important feature of the AllStreets Bailout Plan is 30-year, 3% fixed-rate federal loans shared equally by every mortgage borrower and her lender to convert a significant portion of mortgage debt to government loans not secured by the properties. That feature of plan alone will reduce total mortgage debt by about $1.9 trillion, about 15% of all residential mortgage debt, which cures most of the upside down properties, lowers mortgage payments for every borrower, restores solvency to most lenders, increases the value of collateralized mortgage securities, creates conditions for a major economic recovery and probably provides a setting for housing values to at least stop falling if not to recover. To be fair to all audlt American citizen, the AllStreets Bailout Plan also provides fair access to the same government loans to those who do not have a mortgage or don't own a property. Best of all, with the AllStreets Bailout Plan there will be no cost to taxpayers and it won't increase the deficit at all (actually, it will begin to reduce the deficits by providing economic recovery!).
No Bailout Plan is Perfect
The very word "bailout" has negative connotations, since it presumes that something has gone drastically wrong, and implies that poor human decisions led to the problem. Many people feel that there should be no government bailout of any kind as a matter of moral or political principal, and that events should just take their natural course with homeowners, lenders and investors eating their lossers. But that approach means a long economic depression with unimaginable numbers of bankruptcies, foreclosures, bank failures, and human suffering. We think most will agree it's better to take action, if it's possible to prevent such an unnecessary sequence of events, even if that means some unprecedented action by the federal government. The AllStreets Bailout Plan is the best detailed plan we know about that is both comprehensive enough to succeed in arresting the monumental economic trends in place that could cause a long depression, and provides fair direct benefits for all Americans as well as all beleagured lenders.
More Details of the AllStreets Bailout Plan
One HERC would be issued for every one to four unit residential property (homestead or not) in an amount equal to the approximate drop in the property value from late 2006 or early 2007, say 60% of the drop, but not less than $5,000 per property, plus one to every American who does not own any residence in an amount equal to 10% of the median home value of early 2007 in the area they reside, but not less than $5,000 each. The HERC program would require no more than about $4.7 trillion dollars of loans from the federal government, $2.8 trillion to property owners and $1.9 trillion to non-owners. Some of the funds can come from the $350 billion of existing TARP funds that haven't been released yet by Congress. As a result of the program the $350 billion already lent from TARP funds, and most of the other $3.8 trillion already lent or spent for bailouts would be quickly recovered. The capital would be recovered with interest, less a small percentage of defaults, so the ultimate net cost to taxpayers is zero or less than zero. Compare that to the unrecoverable trillions, of dollars of direct cost to taxpayers of outright handouts, tax incentives, transfer payments, and claims against guarantees of pensions, bank deposits and loans, that would be required in a long depression. Also compare it to the roughly 30 trillion dollars of value that left the U.S. stock market and uncounted trillions that left home equity in 2008. Last, but not least compare it to the $10 trillion of bailout loans, guarantees and outright spending that has already been comitted by the federal government (which, by the way, equals enough to pay off 82% of the $12.2 trillion in total mortgage debt on all U.S. residential properties). As a result of the AllStreets Bailout most of the $10 trillion would not be used, and what has been used would be recovered quickly.
A healthy recovery requires enough healthty lenders eager to lend at reasonable rates, and sufficient numbers of qualified borrowers. The number in each group contracts daily. Lenders have been restricting credit, so many individuals and businesses and governments are being cut off from their ability to roll over credit lines. That's the essence of the credit crisis, and it's killing the economy. Another phase of the financial disaster has started, a collapse in the values of, and lending for, commercial real estate, and that could destroy some of the large banks that presumably are being rescued by TARP funds. The most important priority to stop the crises is to alleviate a significant portion of excess residential mortgage debt. With that done, lenders will be repaired enough to resume normal lending practives, and enough consumers will be relieved of negative home equity and unmanageable debt payments to allow a more normal economic recovery cycle. But, to gain public acceptance, the program must also offer fair benefits to those who don't have a mortgage, or don't own a property. So, it should also allow the use of long-term government loans for other purposes, including providing low-cost secondary financing for property purchases, converting credit card debt to longer term personal debt, funding small businesses, or initiating low cost personal unsecured debt.
Almost 25% of all residential property owners now have either zero or negative equity in their properties. By recent estimates about 23% of all homeowners had negative or no equity by the end of September, 2008 and that percentage certainly grew in October, November, December and January, and will likely keep growing every month for a considerable time, if nothing much more effective is done to relieve negative equity and to enhance housing purchasing power. Having little or negative equity paralyzes homeowners by preventing refinances or normal sales. It paralyzes lenders due to write downs and outright losses due to short sales and foreclosures. There is the terrible prospect that many owners who are either forced to move for various reasons, or are so upside-down for so long that it no longer seems sensible to keep paying the mortgage, will simply walk away from their properties, leaving lenders holding the bag.
Housing values will not come back in any significant way by natural economic forces any time soon because so many financing programs and lenders are gone for good, and so many fewer prospective borrowers still qualify (guidelines have drastically tightened, and rates are higher for most), and because of adverse demographic trends (the worker-to-retiree ratio will drop for many years). Probably the best that can be done is to stop the slide and stabilize the financial system so private lending can resume. The need is extremely urgent, since the damage to the banking and investment sectors from real estate is constraining financing for all other sectors of the economy, and, therefore, all sectors are sinking fast. The window for rescue is closing. Many individuals and businesses are being ruined. Bankruptcies are not reversible and ruined credit is not easily or quickly repaired. In bankruptcies creditors permanently lose most of their money. In foreclosures and short sales lenders lose capital and borrowers' credit is ruined. Affected individuals and businesses are more or less lost for years as contributing factors for near term economic recovery.
The hundreds of billions of dollars (TARP funds) recently thrown by the U.S. Treasury plus the estimated 7 trillion dollars the Federal Reserve Bank has lent to a very limited number of privileged banks and other businesses to rescue their balance sheets from bad loans and investments do virtually nothing to solve what is still the critical fundamental problem, the decline in home values, that has left millions of owners upside-down and vast number of lenders with bad loans. Just adding capital to lender balance sheets, as the Fed special lending programs and the TARP program are doing, doesn't improve prospects for the mortgaged property owners, the source of the problem, or any other consumers, and will not noticeably help the economy in general. The TARP approach is trickle-down economics at its worst. The principals of individual mortgages must be reduced; upside-down borrowers cannot borrow more; broke lenders don't want to lend more! Consumers with damaged credit, particularly foreclosures, cannot buy a property for a long time. The most urgent problem with all credit is on the demand side, not the supply side. The federal government must enable repair of the existing mortgage debt so that the values of mortgages, and mortgage securities, will be restored; then lenders will be more able and willing to lend again, and property owners will be able to refinance or to sell without huge losses or damaged credit.
If you share our views, please contact your U.S. Representative, Senators and President and enlist support among you personal and business contacts (please see our prewritten message and e-mail resource links for elected officials on the Links page). Also, please donate to support our effort to disseminate and promote the plan. -END-
