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How Many Home Loans Could You Make With $700 Billion

How can you tell Paulson's idea is completely dumb?

You can tell because a random real estate broker with no banking experience came up with an also-dumb idea that was, for all its stupidity, a better idea than Paulson's in a couple of days.

My idea finances 20% of the borrowing in the US for a year, and makes us $86.6 billion per year to pay back the taxpayers in 8 years. It rewards the top 58% of borrowers in the country.

Posted by John Lockwood on 09/24/2008 02:06 PM

Comments (4)

$700 Billion Bailout in the Mortgage / Finance Channel

4 Comments on How Many Home Loans Could You Make With $700 Billion

SEP

2008

Not a good idea. The bankers are where the problems are. Mortage backed securities are a great securitized investment. The problem comes when the bankers won't loan against them for collateral anymore due to the fear that each individual one will blow up.

Bankers are being stingy because the lost another loan product (mortages) to a more efficent market. Just like they lost auto loans and credit cards.

Mortage backed securities lost their value because the primary buyers, hedge funds, could no longer leverage them because the banks wouldn't except them as collateral. Then when one has to unload assets in a wholesale they fall below their intrinsic value.

The bailout will buy these securities, create liquidity in the market, The MBS get confidence again and more mortage loans can be made and financed with these. The Treasury borrows the money at 4%, the mortgage backed securities bought at 65 will yield around 12.5% the tax payer makes 8.5% yield plus return of the principal and all for the cost of about 100 basis points.

I didn't say my idea was good, I said it sucks less than Paulson's. As for mortage backed securities being a great securitized investment, if you're right, then they should be selling, because there's always some rich guy who knows enough about investing to buy things -- if in fact they're priced low enough. So if they're not selling, then why is that? It's because they're priced too high. Or do we no longer believe in the demand curve now?

Now the government (and you) are trying to convince me that the same ne'eer-do-wells that brought you aluminum tubes, invasion of the WRONG country, a politicized justice system, water boarding, Guantanamo Bay, warrantless wiretaps, the Patriot Act, and no water for Katrina victims for a week while Bush cleared brush on his ranch should now be trusted with $10,000 per American household to buy investments that are so wonderful that no one in our glorious free market will touch them? That would be the same lovely free market who everyone has been kotowing to since Regan -- up until ten minutes ago when the press scared the crap out of everyone so we'd all would bend over and grab our ankles while the corporate welfare socialists on the lobbyist's payroll take care of their business.

No. I say the deregulationists on both sides of the aisle rolling back the New Deal at the behest of Citibank and others got us into this mess. If they want to be socialists now, that's great, I'll split the difference with them. Let's throw $350 billion at whatever we need to do to join the rest of the civilized world in terms of providing health care to our citizens, and then I'll agree to letting Hank Paulson have $350 Billion to bail out his buddies at Goldman Sachs who for some reason don't want to participate in the golden opportunity to own these "great securitized investments" you love so much.

Otherwise I say the free market can fix it. Adam Smith and all that. Rah, rah, rah -- go capitalism!

SEP

2008

It is true that nobody can really see what will happen if nothing is done. But the warning is that this is different than recessions that we've been through before. It's not just the small businesses and small banks that are going under because of hard times - it is starting at the other end. Huge, Nation wide and world wide companies are going under. This will quickly spiral out of control and reach down to every small business and every American household. Yes, wall street made A LOT of bad moves and things have to change and those responsible need to be help accountable, but that is not the immediate issue. The immediate issue is are we going to continue to allow massive companies to fail and watch our economy go with them? We may be literally talking about a total collapse, but who knows, maybe it won't be that bad - do we want to risk it? Plus, the government is NOT handing out money. You see savvy investors make similar moves all the time (granted not to same degree but the same principle) - Buy ASSETS from a distressed company and sell them off at a later time. This may be a money maker for the tax payer. Again we don't know the future we don't know if it will make money or loose money but it is an INVESTMENT of $700 billion, not a handout of $700 billion. The assets will always have some value to be sold later and, at worst, recoup some of the money if not break even and maybe even make money. The government will not be controlling companies it buys assets from. It will just own the assets that it bought and will only control the assets - NOT the companies.

To illustrate. Some of these assets are real estate (commercial and residential). Mr. Banker lends money to 5 people to buy homes. They were good safe loans. The people had down payment and great credit and work for big stable companies. Mr. Banker makes money from investing the borrowers monthly payments and creating wealth to lend more money. He also borrowers from other banks allowing him to lend to more borrowers. Suddenly, the big company in town goes out of business and 3 of his 5 borrowers are no longer able to pay their mortgage. He takes the houses back and lists them for sale. The houses are not selling because of such high unemployment. His liquidity to function and pay the daily bills has just dried up. Then a new borrower comes in the door and wants to buy a house. If Mr. Banker can lend him some money that will help with his own liquidity problems. He doesn't have any of his own money anymore so he goes to another bank for a loan like he has done many times before. He finds that they are having similar problems and they tell him they don't have the liquid money to help him out. So he has to tell his new borrower no. This borrower is well qualified and should be able to buy a home but the bank is not able to make the deal. Mr. Banker, that is in desperate need to do business, does not have the liquid funds to do so. People hear Mr. Banker is in trouble and they don't want their money with him anymore causing him to go out of business and leaving the town with no way of financing a car, a house, college, starting a business or anything.

Obviously this is simplified but take this situation and give the same problems to every bank in the country that just keeps seeing more and more big companies failing. What is going to happen to the banks and as a result to our economy? This proposal is for the government to step in and buy those houses that Mr. Banker has been trying to sell and then he can do more loans. Then the bank and the community can continue to function. This "bailout" is not to save those that caused the problem nor is it to take away their responsibility. Those are other issues that do need to be resolved. This is a call for swift action to put liquid funds in the market so free trade can continue to function.

Having said this, I hate the idea of government getting this involved. Government is usually not the answer and they usually make things worse but the alternative sounds even worse. I've heard the bailout compared to using radiation to treat cancer. It's going to be expensive, painful and cause a lot of damage. But what else should we do? Let the cancer run rampant?

SEP

2008

I don't see how this will spiral down and hit small banks, if they're not holding mortgage backed securities. To be sure, they may have more trouble selling their loans, but I don't see why there won't always be a market for sane, relatively secure, well-underwritten notes -- you know, the kind we suddenly discovered we needed to have in 2007.

As much as this may be a strange position for a so called liberal to take, I agree with Ron Paul that this is an attempt at price fixing both mortgage backed securities and housing, plain and simple. I know from five years of real estate experience that price is king. If a house isn't selling, lower the price. The same goes for mortgage backed securities. They're not "illiquid" any more than that overpriced listing -- they're just overpriced.

So we have a bunch of crack-smoking loans we can't sell, and Congress's proposed solution is to stuff more crack into the pipe. But we don't need crack, because people like owning homes. So if homes prices fall to the point where people don't need crack-smoking loans to buy them, then we'll stop making crack-smoking loans. Is that good for me? Hell no -- I own a house, and I'm paid on commission. But if Congress hadn't ruined my last job with liberal H-1 visas for the Elbonians, guess what, I wouldn't be in this business of peddling massive debt. Having people who can borrow money they don't have from homes they can't afford to buy cars to go looking for a job is not an economy, it's a disaster. This plan only makes it worse, whether I benefit from it in the short term or not.

To sustain the prices we're trying to fix, we need to keep making the same bad loans that got us into this mess -- and further destroy the value of the dollar by printing money on top of that. Why do you think oil is so expensive? Did OPEC suddenly run out? No, it's expensive because the dollar is in the toilet. The biggest one day jump in the price of oil happened just this week, when Congress announced its plan to print more money.

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