I would give this plan a thumbs down and here’s why:

It is unfair that people who made irresponsible borrowing decisions should benefit. It is also unfair that companies that made wholly irresponsible lending decisions should benefit.

The reality is that there are millions of mortgages that aren’t covered by the current home value. Many of these loans will foreclose, and the banks will lose virtually all of the difference: many states give the lender no recourse for the deficiency, and bankruptcy can wipe away the rest.

This is an unhappy, inconvenient fact, but a fact it is. How do we deal with that reality without either enriching the irresponsible borrower or lender?

Shoveling trillions to stupid bankers (but I repeat myself) or giving cramdown power to unaccountable judges aren’t the answers — though that’s what we’ll get. A plan that allows for the conversion of some of the mortgage debt to equity could work.

Instead of the underwater portion of the mortgage just disappearing, convert it into Appreciation Participation shares. The bank (or Feds, if the asset ends up in a “Bad Bank”) gets a claim on the future appreciation of the property.

The homeowner doesn’t get rewarded when housing prices recover, but a family doesn’t lose its house. The bank doesn’t have to mark down the deficiency, but they are now sharing the burden for the overinflated mortgage.

This plan could even work for solvent borrowers who are current on their payments. If they want to give up future appreciation, allow them a lower payment!

Oh, well, it was an interesting idea (not original to me). Let’s see how badly Uncle Sugar can mess this one up.

We need to return to capitalist principles that espouse:

-Individual moral, ethical, and financial responsibility and accountability.

-Free Markets that are: “true, unencumbered, unfettered, and free from government meddling,interference, and manipulation; and allow supply and demand to determine market prices.

-Reward received is equivalent to the risk taken.
This will cause investors to evaluate risk and determine if they are being paid enough to take the risk and make the investment.
Bailouts simply provide a ’safety net’ a ‘moral hazard’ that eliminates the need to evaluate risk and guarantees investors’ return (reward) regardless of the risk taken with impunity.
Investors’ risk is socialized, profit is privatized and paid for via someone else in this case, the unwilling and unknowing, tax payer who bears the burden of an unfair and coercive tax.
Moreover, 95% of homeowners are individually responsible and current in their mortgage payments, and are being asked to bailout the irresponsible 5% who should probably rent until they have developed the financial discipline necessary for home ownership.
Hopefully, in a few years when taxpayers go to the polls they will make their legislators pay for their poor socioeconomic policy choices.
Additionally, promotion of an individual should be based on merit and measurable performance not politics for politics is truly the enemy of strategy and capitalism as we know it.

‘Necessity is the Mother of invention.’ and ‘Innovation is the one weapon that cannot be defended against.’-Sun Tzu circa 500 BCE

America is still the most innovative country on the planet.

The Plan to solve America’s economic, financial and capitalist dilemma:

-Allow those who are in foreclosure to be foreclosed upon.
In the short run, the increased supply of homes will reduce their price, but in the mid to long term, housing prices would stabilize and increase and this would allow those who have been responsible to realize their dream of home ownership while limiting the risk to the rest of us.
When house prices fall, it does affect all of us; however, it affects us all equally (on a geographically specific relative percentage basis, not absolute dollar basis). We bear the risk of market price fluctuations together; but do not foist that risk onto someone else, which is only fair. We take the risk that our home price may rise or may fall but we take responsibility for that risk and as such benefit if prices rise relative to our cost basis or lose equity should prices fall.

-Allow poorly run, inefficient businesses and their managements to fail via bankruptcy proceedings if necessary.
This includes bondholders who would take a haircut, stockholders who would be wiped out and management who do not deserve to manage based on their own poor performance and publicly displayed, quantifiable results. For banks specifically and others more generally, this would limit bonuses, if not eliminate them altogether. Feckless an ineffective poorly performing management would be ousted, stockholders wiped out, debt aka bonds revalued or swapped for equity, while protecting depositors and other ‘good assets’. Good assets would be sold to other more effective operators and the bad assets would be quarantined.
Why keep ineffective management in place? If the company has been driven into bankruptcy, how much worse can new management possibly be?

-Prosecute those who committed mortgage application fraud.
They can choose to deal with the DOJ, FBI, SEC, IRS or all of them if they so desire but it would teach them and everyone else a lesson and that is that ‘loan application fraud’ will not be tolerated and does have severe consequences for both borrower and lender.

-Re-instate Glass-Steagall and dis-integrate the amalgamated mega-banks that have grown so large as to be, ‘too big to fail’.
In spite of what Phil Gramm may think or say to the contrary.

-Introduce a new immigration policy similar to what the US had in the 1800’s.
This will increase the population and create more demand for goods, services and homes.

That’s my recommendation and I’m sticking to it, for whatever it’s worth.

Related Posts:

• No Kidding: “The only thing missing from the party is the U.S. worker and consumer. ”
• Stop Paying Your Mortgage Today
• Some things that I cant seem to forget when analysing this downward trend:
• This market is long over due for a correction.
• How the Fed’s Massive MBS Purchases Harm Banks?

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