my mortgage bailout proposition

If the ice cream fall off your little brother’s ice cream cone, by some bizarre combination of probability/randomness and physics and through nothing that’s really  his fault, it’s reasonable for your mother to ask you  to split the rest of your cone with him.  it might not be fair to you, strictly speaking, but it’s not rewarding him for bad behavior.  and even though it might not seem like it at the time, it’s in your best interest to help your brother out (you’re going to need each other down the line…)

listening to Marketplace this week, I had to think twice about what I thought I heard from FDIC Chairwoman Sheila Blair (I actually can’t confirm now if it was her, I can’t find any mention of the interview on Marketplace).

she was responding to the issue of Fairness, and the complaints she had heard that bailing out people in bad mortgages was not fair.  this argument is based on the fact that these mortgagees entered into contracts that are legal and ought to be binding, and if they were misled by market prices and trends that is a risk all home buyers bear.  why should the majority of people that have made prudent, measured, informed mortgage decisions bail out those who have not?  “it’s not fair!” — (I’m not whining or arguing this point right now, I’m just re-stating the argument.)

Blair’s response to the argument, that the responsible should not have to bail out the irresponsible, was one we’ve all heard before, that ‘life isn’t always fair’

it’s something I say myself, pretty frequently.  but it’s different to say ‘life isn’t fair’ when you’re dealing with things that are probabilities and uncertainties.  you can’t expect fairness when you’re talking about occurences of terminal diseases, or car accidents, or getting ripped off by a vending machine.

‘life isn’t always fair’ is an acceptable response to people who bought more home than they could afford, with mortgage products (ARMs, etc) that are relatively new and which they probably didn’t fully understand, on the underlying assumption that the housing market bubble would never burst.  people were playing the real estate market like it was the stock market — speculating, flipping, almost day-trading — and very very few people try to argue that the Dow dropping “isn’t fair”.  (a few do, they typically sue a specific companies management, not their brokers or the market in general.)

but ‘it isn’t fair’ does seem like a perfectly good argument against government action — intentional action, not a random or probabilistic outcome — that aims to pacify a constituency, paying for their failures on the backs of taxpayers and those who managed to not default on their mortgage.

if your little brother stacked his ice cream higher than he could support and started spinning in circles, dizzying himself and spilling his ice cream, it would be unfair of mom to ask you to share the rest of yours.  even more unfair for mom to force you to share — and as nicely as they try to make it sound, the government never asks you to do anything…  just try withholding the portion of your taxes that represent your portion of the mortgage-bailout, and let me know how that works out.

my proposition

yikes, I almost didn’t get to the point.

I believe the proposal Blair was pitching

  • refinances the mortgage so that the monthly payment is no more than 1/3 of their monthly salary
  • AND resets the principle of the mortgage to 95% of the current market value of the home.

to make those variables jive, the mortgage principle may need to be a lot less than then they owe to the bank.  it’s not clear who is supposed to eat that additional cost — the bank?  the Feds/taxpayer?

here’s my proposal:

  • principle owed stays the same:  nobody takes a loss
  • government secures lowest reasonable interest rate
  • term of loan extended out as far as possible to get the payment down to 35% of income
  • if monthly payment with term of infinity still exceeds income %, you accumulate more debt until death (“infinite term” doesn’t make sense, does it? — just call it a perpetual interest-only loan.  ie. “you’re renting from the bank”)
  • if the bank thinks you might die before you pay off, they have an ‘insurable interest’ in you and can buy life insurance to cover the mortgage in the event of your death

odds are really good that the housing market will rebound (at least getting your equity back up to zero) before you die.  and if not, you’re dead anyway and your heirs don’t owe anything to the bank.  insurance companies make these policies all the time; they won’t lose money.  from what I can see, everyone wins.

I must be missing something.

for what it’s worth, “mortgage” literally means “death pledge“:

mort·gage

[Middle English morgage, from Old French : mort, dead (from Vulgar Latin *mortus, from Latin mortuus, past participle of morī, to die; see mer- in Indo-European roots) + gage, pledge (of Germanic origin).]

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6 Comments

Filed under finance, money

6 responses to “my mortgage bailout proposition

  1. pizzaboychronicles

    Thats the smartest thing Ive heard anybody say about the mortgage crisis. I do have a question. Do you think the banks deserve any kind of penalty or reform for selling these huge mortgages to people who obviously wouldn’t be able to pay them? Check out my blog sometime…

    http://pizzaboychronicles.wordpress.com/

  2. Kevin

    Would this be enough to stop most people in a bad situation from just not paying their mortgage anymore?

  3. pbc: I’ve typed up about four responses, each of which got sidetracked and convoluted. maybe this will come out coherent:

    in short No, no broad penalties for “the banks”, but if you can find individual cases of fraud or unfair lending practices by all means, take them to court. on the whole, I think they were caught up in the optimism that comes with a market bubble, and the banks really hurt themselves in the process. anyone who tries to paint a picture of the banks coming out of this unscathed is deluding themselves — some of them have failed outright, others been acquired (that’s failure in their books)… I know it’s hard to feel sympathy for them, but they’re screwed too.

    I think the crisis itself will reform the system — once this sorts itself out, everyone is going to be more careful about originating loans, buying other people’s debt products… it was a tough lesson, but the system will remember for a while. and then they’ll forget, and we’ll have another crisis.

    all the regulation in the world can’t prevent people/banks/nations from forgetting the lessons of the past in an attempt to get an edge/advantage. if there’s one thing you can bank on, it’s a correction after a bubble.

  4. Your proposition is pretty much the same thing my dad was suggesting.

    As for the correction after the bubble and failures to retain lessons of past crises– “amen” to both!

  5. pizzaboychronicles

    Favorited

  6. pbc: “Thats the smartest thing Ive heard anybody say about the mortgage crisis.”

    dude, you need to get out more. 😛

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