Mortgage foreclosures are at an all time high. Citigroup has just announced that it will go along with allowing judges to re-write mortgages in cases of foreclosures brought on by bankruptcy filings. We have an epidemic of falling home prices all over the country. So what can we make of all of this?
Those people with mortgages taken out with 20% down, and 80% financed have seen the values of their homes decline 20-30 and even 40% in the last year or so. This means that there is no longer any equity in their home, but the mortgage payment remains the same.
Traditional fixed rate mortgages have dropped from the high 6’s to the low 5% range, and predicted to go even lower. But who can afford to refinance when their equity has been wiped out?
Courts may save some people who have given up and declared for bankruptcy. One court this week rewrote one debtor’s mortgage to about 60% of the original amount and at a very attractive low rate. But – this was done for a debtor who had two investment properties! Investment properties? How about the poor homeowners (there are 59,000,000 mortgages outstanding in this country) who didn’t speculate on investment properties, but just kept paying on their own mortgage? Shouldn’t the Government be thinking seriously of what they could do to help this huge group of people?
An extremely interesting idea has recently been floated about rescuing the American Home Owner. Basically this idea calls for the Government to dictate that all 59,000,000 mortgages would be rewritten. They suggest that the new interest rate would be set at 1.5% for 30 years, and the amount of the mortgage would be determined by an independent appraisal based on the current value of the property.
What would happen under this novel approach would be to lower the typical mortgage payment (P&I) by about 50%! (A $1400 monthly payment on a $200,000 mortgage would be reduced to about $700, thereby freeing up $700 per month for the homeowner to spend in other ways!
It is true that current mortgage holders would take a substantial loss to their portfolio, but overall this would be a lesser loss than that taken when an owner walks away from a house, or files for bankruptcy, or allows his property to go to the foreclosure jackals.
With the additional money available to these 59 million households there would be an instant financial stimulus created with millions of people having a lot of spendable income to spur the economy. With that boost in place, everyone, including renters, people who own their homes outright, people living at home – everyone – would benefit with more people working, more people spending, more jobs, and more good things for everyone.
With home prices stabilized, foreclosures would return to their normal miniscule levels, jobs will be created to provide the goods and services created by the increased spending and the recession/depression or whatever you want to call the mess we are in would be no more.
Government tax revenues would be enhanced because (1) the interest deduction will automatically be smaller which will create a somewhat greater tax burden. But there will be significantly more sales and income taxes collected from all the money that has been freed up, and from the jobs created by this pent up demand.
This entire plan was laid out in a full page ad in USA TODAY on page 11A of the December 9, 2008 edition. I urge all of you to look at this page, and perhaps go into the author’s blog at RemortgageAmerica.blogspot.com. The person who contributed this article was Dennis F. Paulaha, Ph.D. Economics at d.paulaha.com.
Tuesday, January 13, 2009
Friday, January 2, 2009
THE BIG THREE BAILOUT
The big three automakers want a bailout! What's this all about? Reviewing some of the events of the last few weeks, I see the following:
1) GM,Chrysler and Ford have all managed to work themselves into a deplorable financial position. GM and Chrysler are in such bad shape, that they claimed they might have to file for bankruptcy by January 1st. Ford, though hurting, is in far better health and can manage for up to a year without direct government help.
2) Why shouldn't GM and Chrysler be allowed (or even encouraged) to go into bankruptcy(Chapter 11) just like any other failing corporation? There is a fairly large body of thought that they SHOULD be allowed to do just that. In fact polls consistently find nearly 60% of Americans support bankruptcy as the best option for them. But politically it is seen as too much of a risk to an already shaky, fragile economy. The UAW and GM/Chrysler management have worked frantically to get us to believe "the sky is failling" theory of bankruptcy. They totally ignore the examples of United Airlines, USAir, Delta, Northwest and Chrysler (of all things!)
3) But lets face reality here. Ch 11 is designed to allow the company to reorganize - debt, contracts, Union contracts, wages, work rules etc, and of course, all of these stakeholders are threatened by this, because in one way or another, they are all going to have to give up "a lot!" So what are the options?
The Senate felt they could work out all the steps that would result in a reorganized company without going into Ch.11. There were a large number of Senators (both Dems and Reps) adamantly against the Congress getting involved in any way at all. But, there was also a substantial number of Senators determined to craft a workable program. As one Republican Senator said, "we were within six minutes" of getting a deal approved. Then the UAW took a calculated risk: they rejected the plan because it would have resulted in substantially lower wages and benefits and much less onerous work rules. They gambled that once a new President entered the White House, all bets would be off and they could exert enough pressure on Obama to cut a much better deal for their membership.
So the Republicans walked away from the deal, as well they should have. The UAW has mugged the Big Three for 70 years, and this action was in perfect harmony with their long established modus operandi. Negotiation paired with blackmail had always worked before, so why not now?
The Republicans, for once, can be proud of their efforts to get this plan done quickly, but they can be equally proud of walking away from another UAW mugging.
Now, President Bush has stepped in and released sufficient funds to get GM and Chrysler through the next 2-3 months. This was done with the clear understanding that all the parties would agree on a restructuring(ala Ch.11 criteria) by March 31st, and this WOULD INCLUDE THE UAW! Now, the ball is in Obama's court. Will he have the political courage to force GM and Chrysler to carry through this "Chapter 11 - like" reorganization, and to hell with the UAW! This is obviously going to be very interesting to watch, because it can define his entire Presidency.
4) As I see it, the GOP Senate came out a winner in all of this. President Bush came out a winner, as well. The UAW came out nakedly shown for what they really are - Union first, the companies and the country be damned!
5) Finally, the more I thought about this Auto Industry dilemma, the more I realized the arrogant and inept Auto Industry management really didn't deserve a huge bail out "'gift". Nor should the thugs at the UAW deserve to have their outrageous demands further validated. So, I do believe a package to get them past this current (alleged) crisis is acceptable, if, and only if, it is accompanied by a "complete" reorganization plan (as if in Chapter 11) that would be carried out in a period of 3-4 months.
My belief is this plan will result in a stronger US auto industry, albeit somewhat smaller. I see no reason whatsoever for Chrysler continuing in business. I would facilitate a pla that would devide Chrysler's product line (and assets) essentially in half: half to Ford and half to General Motors, with precious little payment to Chrysler's owners (Cerberus). Remember, Cerberus made it very clear that they didn't think Chrysler was a good enough risk to invest any more money, even though they had assets of over $30 billion! So one has to ask: why should the American tax payor invest in them? Chrysler's owners should get whatever percentage would have been associated with a Chapter 7 liquidation. This would probably be no more than 2-5 cents on the dollar.
Now, all of these steps would really result in a substantial restructuring of the U.S. Auto Industry!
The big three automakers want a bailout! What's this all about? Reviewing some of the events of the last few weeks, I see the following:
1) GM,Chrysler and Ford have all managed to work themselves into a deplorable financial position. GM and Chrysler are in such bad shape, that they claimed they might have to file for bankruptcy by January 1st. Ford, though hurting, is in far better health and can manage for up to a year without direct government help.
2) Why shouldn't GM and Chrysler be allowed (or even encouraged) to go into bankruptcy(Chapter 11) just like any other failing corporation? There is a fairly large body of thought that they SHOULD be allowed to do just that. In fact polls consistently find nearly 60% of Americans support bankruptcy as the best option for them. But politically it is seen as too much of a risk to an already shaky, fragile economy. The UAW and GM/Chrysler management have worked frantically to get us to believe "the sky is failling" theory of bankruptcy. They totally ignore the examples of United Airlines, USAir, Delta, Northwest and Chrysler (of all things!)
3) But lets face reality here. Ch 11 is designed to allow the company to reorganize - debt, contracts, Union contracts, wages, work rules etc, and of course, all of these stakeholders are threatened by this, because in one way or another, they are all going to have to give up "a lot!" So what are the options?
The Senate felt they could work out all the steps that would result in a reorganized company without going into Ch.11. There were a large number of Senators (both Dems and Reps) adamantly against the Congress getting involved in any way at all. But, there was also a substantial number of Senators determined to craft a workable program. As one Republican Senator said, "we were within six minutes" of getting a deal approved. Then the UAW took a calculated risk: they rejected the plan because it would have resulted in substantially lower wages and benefits and much less onerous work rules. They gambled that once a new President entered the White House, all bets would be off and they could exert enough pressure on Obama to cut a much better deal for their membership.
So the Republicans walked away from the deal, as well they should have. The UAW has mugged the Big Three for 70 years, and this action was in perfect harmony with their long established modus operandi. Negotiation paired with blackmail had always worked before, so why not now?
The Republicans, for once, can be proud of their efforts to get this plan done quickly, but they can be equally proud of walking away from another UAW mugging.
Now, President Bush has stepped in and released sufficient funds to get GM and Chrysler through the next 2-3 months. This was done with the clear understanding that all the parties would agree on a restructuring(ala Ch.11 criteria) by March 31st, and this WOULD INCLUDE THE UAW! Now, the ball is in Obama's court. Will he have the political courage to force GM and Chrysler to carry through this "Chapter 11 - like" reorganization, and to hell with the UAW! This is obviously going to be very interesting to watch, because it can define his entire Presidency.
4) As I see it, the GOP Senate came out a winner in all of this. President Bush came out a winner, as well. The UAW came out nakedly shown for what they really are - Union first, the companies and the country be damned!
5) Finally, the more I thought about this Auto Industry dilemma, the more I realized the arrogant and inept Auto Industry management really didn't deserve a huge bail out "'gift". Nor should the thugs at the UAW deserve to have their outrageous demands further validated. So, I do believe a package to get them past this current (alleged) crisis is acceptable, if, and only if, it is accompanied by a "complete" reorganization plan (as if in Chapter 11) that would be carried out in a period of 3-4 months.
My belief is this plan will result in a stronger US auto industry, albeit somewhat smaller. I see no reason whatsoever for Chrysler continuing in business. I would facilitate a pla that would devide Chrysler's product line (and assets) essentially in half: half to Ford and half to General Motors, with precious little payment to Chrysler's owners (Cerberus). Remember, Cerberus made it very clear that they didn't think Chrysler was a good enough risk to invest any more money, even though they had assets of over $30 billion! So one has to ask: why should the American tax payor invest in them? Chrysler's owners should get whatever percentage would have been associated with a Chapter 7 liquidation. This would probably be no more than 2-5 cents on the dollar.
Now, all of these steps would really result in a substantial restructuring of the U.S. Auto Industry!
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