The debate rages on over the details of the housing rescue plan and will continue to do so for years to come. The moral hazard argument is fired up once again but now it is encompassing not only the issue of supporting our financial institutions who created this big mess, but it is very heated over the issue of rewarding bad behavior for those homeowners who lied about their incomes to get a mortgage that everyone knew they could not afford. There is no perfect solution to date and there will never be one. All we can hope to accomplish is to stem the tidal wave of foreclosures. It is clear that, as a nation, we have not moved past the anger stage yet. In moving forward, we must get over our anger and distrust, and work together to bring us out of these difficult times. The risk we take by no action is a prolonged and very ugly recession/depression. As much as we resent having to pay for our neighbors indiscretions, innocent or otherwise, if we do not act, we only cut our nose to spite our face. The Homeowner Affordability and Stability Plan as it is dubbed, has three major components that address some of the current problems that so many homeowners face to date. First, the plan will attempt to help as many as 5 million homeowners refinance their mortgages owned or guaranteed by Fannie and Freddie. Refinancings will be limited to 105% of LTV. Second, $75B will be used to match reductions lenders make in interest payments that lower borrowers’ payments to 31% of their monthly income. Under the program, a lender would be responsible for reducing monthly payments to no more than 38% of a borrower’s income, with government sharing the cost to further cut the rate to 31%. Third, the government will increase the size of Fannie and Freddie’s retained portfolios and will increase by $200B the amount of preferred stock it will buy in the GSEs thus adding support to their balance sheets while attempting to lower mortgage rates. To see the complete details go to http://www.treas.gov/press/releases/tg33.htm. Obviously this plan does not help everyone and we run the risk of some people getting government assistance that really do not need it. We can avoid much of this with proper due diligence, which we know if it was done in the first place, many loans would not have in fact been made. We also know that the statistics on loan modifications have been horrific in that more than 50%- 60% have redefaulted. Let us not confuse the causes of the markets declines with talk from the likes of Senator Christopher Dodd ( D. Conn.) that we may end up nationalizing some banks. People with perhaps more knowledge and respect have voiced a similar scenario before he made his comments to Bloomberg Television last Friday. Dr. Doom himself, Nouriel Roubini, stated a week prior to the Senator’s comments, that a takeover and resale of some banks may be the marketfriendly solution. This idea is similar to what the Swedes did in the 1990s. They took over failing banks, cleaned them up,and sold them in rapid order to the private sector. With all the guarantees, liquidity support and capitalization that the government has already done with many banks, they already control a huge portion of the banking system. Call it what you want.
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