My Bail-Out Plan

~ Doug

I’m no economist, and I won’t be surprised if this idea is fundamentally unsound, but here it is. We need to get these bad loans off the books of our financial institutions in order to open up credit markets. But rather than buying the loans (which are so hard to value), why don’t we acquire the underlying properties of defaulted loans then rent them to the current occupants? We can buy them at a steep discount. I don’t know, maybe the government pays 75% of the current value or (to make it easy) 50% of any appraisal prior to April 1, 2008. The mortgage holders lose money, but that should happen anyway.

  • People who stand to lose their homes and otherwise be out on the street become renters, which they probably should have been all along.
  • We eliminate the problem in which homeowners who continued to pay their mortgages don’t feel like their neighbors who couldn’t pay their mortgages received an unfair bailout.
  • We don’t have to value the derivative securities, which is very hard.
  • The mortgage holders and those with credit default swaps (CDS’s) share in the downside, paying some of the cost for their recklessness.
  • We have the potential upside due to the discounting.
  • The government auctions the acquired properties, spread out over a 5- to 10-year period (selecting the properties randomly) to avoid depressing the real estate market further due to a flood of properties.
  • Ultimately we make a profit. Our dollars are going into tangible real estate, not some abstract financial instrument.
  • We may want to do this through state and local governments rather then federally. The more local we make it, the easier it will be to manage and maintain the properties. The federal roles are (a) to provide funds, (b) to set standards, and (c) to audit the process.

At an average home price of $215,000 and a 25% discount, $700 billion allows us to acquire nearly four million homes, even including a 10% cost to administer the program. If we need to acquire more than four million homes — something we should be able to determine easily — we reduce the amount we pay to the current mortgage holders. If it’s less than four million homes, it costs us less than the $700 billion in the Paulson plan.

Like I say, it’s an amateur idea and probably flawed, but I like the facts that (a) it’s simple, (b) over time, the government gets out of this (as homes are sold), so it doesn’t create a permanent beauracracy, (c) no one gets rich, and (d) no one loses the roof over their head.

Tell me why this won’t work.

Update: Still waiting for an expert to point out the flaws, but I’m getting a lot of supportive email. If you like the idea, email your senators and congressperson with a link to this page. I’ve sent it to Boxer, Feinstein and Rep. Woolsey. If you have a Senator on the Banking Committee or a rep on the House Financial Services Committee, even better.

4 thoughts on “My Bail-Out Plan”

  2. This would require the US government to expand HUD to manage the properties. This would require a HUGE expansion of an agency that has been abused by this administration. I agree that it would be better for state and local governments to administer the properties, they do not have the resources. What I would rather see is ALL borrowers, regardless of the status of their loans have the ability to renegotiate their loans. That would mitigate the hostility between the “haves and have nots”.
    I would rather see Congress use an oversight board to administer the funds. Instead of giving the Treasury a blank check for $700 billion, it would be similar to a line of credit that would be allocated in blocks of $100 billion each. Treasury would have to justify each new block of funding. Firms that accept ANY of the funds will be subject to regulation/oversight.
    “Key executives” of the firms asking or accepting funds would be limited to compensation no greater than $400,000/year, stock options would be cancelled, and bonuses would be forfeited.
    Additional regulation including changes in accounting practices, and legislating minimal requirements for home mortgage loans. The new minimal requirements would extend to the borrower and lender. Lending to first time buyers and high risk borrowers would be limited to specific lenders and those lenders would be able to buy government insurance to cover those loans.

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  3. First, in response to lydjgarcia, I think the problem with banks renegotiating loans is that they would probably profit most from renegotiating the loan holders out onto the street and selling the homes themselves. While they’re likely underwater on a minority of headline-making loans they foolishly issued, the bulk of those up for renegotiation have some equity in their homes. Add to that the transfer of those properties from individual homeowners to an eventual baron (the gov’t isn’t going to maintain this program for eternity), and this is the first dot on a very scary institutionalized feudal trendline.

    Second, and I’ve made this point, is rooted in the notion that avoiding the building blocks of corruption downstream is a good strategy. One thing that the Bush admin. should have scared into us all, forever, is that any potential for greed-based insanity will definitely be exploited. When the unbelievable percentage of homes in, say, Stockton, CA are taken over by the gov’t, there will be a day when the gov’t wants to unload those homes. Depending on who’s at the helm when that day comes, terribly awful things could happen to that town and its residents. When will the homes be liquidated? To whom? What will happen to these leases when they are?

    I guess my bottom line is this:
    The plan and the rebuttal I cite takes into account an institutionalized philanthropy that might be the spirit of the day, but won’t be the spirit of the century. This is a ‘big government’ move as another comment points out, and the inevitable reduction/reversal of this action will likely spell disaster for its beneficiaries.

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