Saturday, October 04, 2008


by CB

People fear math. As a result of that fear the math-geeks of the world spin people into passivity with condescending comments about how only math PhDs can understand the current mortgage and credit crises.

This annoys me. So I try to do my part by explaining what's going on. Because of that I am also asked fairly often - "You seem to understand this mess - what would YOU do?"

Now that TARP is ready to start working, here is my suggestion for the NEXT step. Think of it as an extension of TARP. TARP is there to protect us from the annihilation of the entire financial system, so I'll go with another giant canvas metaphor, this one a sail, intended to catch the wind, to carry us away from the catastrophe.

Here is TARP II, the big canvas sail. But I am giving it a hip-hop name. "Rezz-Q."

*insert blaring hip-hop music here*

Rezz-Q is my one-two punch for TARP and beyond. My proposal is to immediately reduce the interest rates on all mortgages to 5.25%. Fixed, for the duration of the mortgage. If you have a mortgage with a rate over 5.25% then your final maturity date would stay the same, your outstanding principal balance would stay the same, and your interest rate would fall to 5.25%. And if you don't have a mortgage then there would be a 12-month period during which Fannie Mae and Freddie Mac must establish qualification rules, and if you qualify then they must extend you a mortgage at 5.25%.

I am serious.

This solves all the problems for which people hate TARP, and provides an economic stimulus FAR more powerful than a bunch of $400 checks signed by George W Bush, which are just more federal debt for your children to pay.

Rezz-Q punishes those that caused the financial crisis but benefit from TARP, because it reduces their income. But not in a way that destroys their balance sheet or contributes to their demise. They will earn a bit less income from their outstanding mortgages, and they will be reminded of it until the last payment on the last mortgage gets paid, which frankly, seems more than fair to me.

It forces modifications to teaser ARMS which have left homeowners unable to pay their mortgages, but weeds out the liars and the speculators. If you cannot afford 5.25% on your mortgage then you cannot afford your mortgage and foreclosure should follow. Period.

A “modification” is a change to your mortgage to help you get out of delinquency, help you avoid foreclosures. Rezz-Q would modify ALL mortgages - even the healthy ones, to reduce delinquencies, to reduce foreclosures, and to slow the decline in home prices. But it would also compensate taxpayers for having to support TARP, and would stimulate the economy.

And it's SO much better than anything else that's been suggested. Like a mortgage deduction if you don't itemize. (Come ON. What are there, like, ELEVEN people out there that would help?!)

Or more education for borrowers. (You know - Chapter 4 from the "Let the industry regulate itself" handbook.)

Rezz-Q is fair. It doesn't reward the delinquent while ignoring the struggling but fiscally prudent, which is what all proposed and existing help-for-homeowners- programs offer. With Rezz-Q everyone benefits. Why should the reckless be offered a lifeline to modify their mortgage while the homeowner who cuts back on food and heat in order to pay on time gets no help?

It is MASSIVELY cheaper than new government programs to help distressed borrowers, and drastically cheaper than foreclosure. In addition, the entire cost is born by the lenders. This again, seems fair to me. Because there is no such thing as a bank that would be forced to modify their loans outstanding but doesn't benefit from TARP. The entire financial industry benefits from TARP - all are better off from having the U.S. taxpayer step in to prevent a financial meltdown. Every bank, every credit union, every mortgage company, every mortgage servicer, every mutual fund, every money market fund - all, ALL of them benefit from TARP, either directly or indirectly. They can all give something back.

We've already taken over Fannie Mae and Freddie Mac, so let's require something in return for saving them. They were created to facilitate home ownership AND low-income housing which they turned their back on. Let's take advantage of the fact that we now own them, make them start cranking out some modifications, and let them return to their roots.

Rezz-Q is a sure thing, requiring the financial industry to give back NOW, rather than relying on some vague legislative language about a 'future tax on the issuance of securities.........sometime in five years.......if TARP costs the taxpayers money.........' (I'm not holding my breath.) The financial industry pays now, and it's over and done with. Moral obligation satisfied. Move on.

The costs to banks are directly proportional to the risk that they took on. The more risky the mortgage product you created the more you have to modify under Rezz-Q. How apropos.

It is fairly zero-cost to the federal government. Congress passes the legislation (do feel free to call them!) and from that point on the expense are borne by the industry they have stepped in to save.

Rezz-Q would be a serious stimulus to the economy. Everyone with a mortgage benefits. A typical homeowner with a mortgage of $150,000 at a current rate of 7.00% would save $169 a month. Every month for the rest of their mortgage.

That would buy a LOT of gas. Or food. Or health insurance. It would cover half the car payment on a $20,000 hybrid car.

It wouldn't require expensive regulatory oversight - all homeowners would know whether their mortgage went down or not. And the financial industry could hardly argue that it wasn't possible for them to recalculate all those interest rates; that is easy math. Especially considering that their penchant for highly sophisticated mortgage derivatives wasn't beyond their modeling capabilities. (sarcasm intended)

Is it possible for Congress to interfere with private industry? Can they DO that? Can they require that banks modify outstanding contracts? Gee, I don't know, let's ask Henry Paulson, Chris Cox, Ben Bernanke, and Nancy Pelosi. Oh goodie - turns out it's possible!

But I'm sure you're still wondering, why call it Rezz-Q? Why the hip-hop name, rather than something reminiscent of an evening sail off Martha’s Vineyard? Because one of the final requirements that this program must satisfy is to scare the HECK out of an industry. To ensure that they never EVER want to go through this again. The industry didn't hate TARP, but they need to HATE Rezz-Q. Legislators and economists and sociologists worry about the "moral hazard" of an enormous program like TARP. They fear that by offering a life-line to an entire industry in its darkest moment that they will subconsciously reward risky behavior.

So let's bring back the hazard. Let's make sure that the industry feels the fear. They're walking down that dark dark's's scary.....there has never been such real danger. They feel the hair on the back of their neck stand up and they KNOW it's BAD, their very existence has ever been more tenuous.

But no! It's a rescue! They’re safe! They'll make it!

And JUST when they thought the danger had passed - when they are ready to be cocky again, ready to swagger down the same scary path again, they see.....they hear........they FEAR....


*insert blaring hip-hop music here*

Feel the fear.

Fear Rezz-Q!



brendaj said...

I Love You, CB!

Anonymous said...

I don't like hip-hop, but I like your idea.