"Summers, who is director of the White House’s National Economic Council, said the economy will be in for a rough time for a while and that unemployment will continue to rise, even with the stimulus package.
“I fear the economy will probably be showing decline and jobs will probably be being lost for some time going forward,” Summers said. He added that the stimulus will probably prevent the unemployment rate from going above 10 percent, after it reached 7.6 percent in January"
However let us just apply a small bit of logic.First, assume that a person bought a home at some price, but the issue was that they could pay the mortgage, no matter what the price. It was not the price but the ability to pay the mortgage which was important. If the market value of the home falls then the ability to pay may or may not have changed but that may very well be independent of the value of the house. The person could be ill or could have lost their job, a risk of say 8-10%, and thus could no longer pay. We assume that the lender would factor in such risk. If they factored in 4-5% risk then they suffer an excess loss of 4-5% which may be their profit but would not collapse their Balance Sheet.
Second, if the First assumption is not correct, that is the lender knew ab initio that the borrower could not pay, or the borrower lied and defrauded the lender, or there was collusion by both to defraud the loan buyer such as Freddie Mac, then this is a criminal act, with one or two parties involved. So where is the Department of Justice? Why has not one Lender and not one Borrower been indicted? This applied to Bush as well as Obama.
Third, the current theme is that if one has bought an asset, and one had entered into a legal transaction and one is still able to pay for the debt on the initial purchase, then if the asset is now no longer worth what it was purchased for then one should have the rest of the taxpayers eat the loss and assist that person! Fair, only of you are the current administration. It may buy votes, but frankly it may also cost votes amongst those paying. A dangerous plan.
Is this what Summers is doing? We shall see.
An alternative to this is that we create a Government Home Loan Bank which then takes the mortgage notes at face value, namely for the value of the property at time of purchase less payment on principal. Even better, if the Government Bank could negotiate a haircut on the purchase of a mortgage at risk, it could get a $300,000 mortgage for say $200,000. The Bank then reissues a new mortgage at that value, and for say 3% and 40 years. If the borrower was able to pay the original note then this new Government Home Loan Bank note would be very payable also. Unless of course there was fraud at the outset and then they should and must pay!
Then at the time of sale, if the value of the asset is less than what the note is worth, say the home was originally for $300,000, and the mortgage was at that level as well, but the sale of the house in a fair market price is $225,000, then the Government takes the loss. However if the owners hold the asset for a while, and if the economy improves, then those losses could be de minimis and spread out over time.
Then even better, the Bank would be ahead of the game and the Government could sell shares in the Bank and finally privatize it totally for a handsome profit. Novel idea, no! Imagine the Government managing it so we the taxpayers do not have to pay and in addition we make money! See what happens when you do not just have bureaucrats and academics.
Why not try that rather than paying people to pay the people who created this mess! If there were the slightest bit of honesty anywhere in these loans then this simple plan should work. If not then we are just paying off the Countrywides and their ilk. Pity, just more of our grandchildrens' future down the proverbial rat hole!
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