Ask Obama About Housing

The President is sitting down to answer your questions about his plan during a live online event hosted by Zillow, the online real estate market place, with media partner Yahoo!.

Broad Concern about 'Fiscal Cliff' Consequences

A majority of Americans expect the U.S. to go over the fiscal cliff at the beginning of 2013 and would blame Republicans if that happens, according to a poll published today.

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Public Is Skeptical Deal Will Be Reached

Source: people-press.org via Bob on Pinterest

Continue reading - Broad Concern about 'Fiscal Cliff' Consequences

Colin Powell endorses Barack Obama for president

(CBS News) Former Secretary of State Colin Powell broke with the Republican party during the 2008 election, to endorse then-candidate Barack Obama for president, calling Obama a "transformational figure." 

With 12 days to go before the presidential election, Powell publicly endorsed President Obama for re-election on "CBS This Morning" Thursday 

"I voted for him in 2008 and I plan to stick with him in 2012 and I'll be voting for he and for Vice President Joe Biden next month."

Morning Journal--The big four economic indicators

Economics

This Week’s Data

The Fed released its latest Beige Book; and the results are not unexpected nor different from anything Bernanke has been saying in his congressional testimony: retail spending is disappointing but manufacturing, housing, loan demand and sentiment are improving slowly. No hint of the need for QEIII.

Weekly jobless claims rose 36,000 versus estimates of up 15,000.
http://www.calculatedriskblog.com/2012/07/weekly-initial-unemployment-claims_19.html

Who Is The Smallest Government Spender Since Eisenhower? Barack Obama

It’s enough to make even the most ardent Obama cynic scratch his head in confusion.

Amidst all the cries of Barack Obama being the most prolific big government spender the nation has ever suffered, Marketwatch is reporting that our president has actually been tighter with a buck than any United States president since Dwight D. Eisenhower.

Who knew?

Check out the chart the chart below

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AllAmerInvest Cooperman, Obama Fear, China Doink, CNBC, Better Yet?, Let em Fail

LEON COOPERMAN: Here's 9 Ways To Fix The US Economy

#2: Create a peace-time Works Progress Administration to channel a portion of savings into the US infrastructure.

Read more

Obama’s morbid fear of EU meltdown
But behind the scenes, within both the administration and Mr Obama’s campaign team in Chicago, there is a morbid fear about a eurozone meltdown and its flow-on impact on the US economy and the president’s re-election chances.

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CNBC Portfolio Challenge Bonus Bucks Answers for Thursday, December 1

@AllAmerInvest Stocks UP Size Thank You China, Obama, the Cure, Bonus Bucks Answers , More

Stocks up size, will the rally hold?

8 15 AM

Looks very good right now. Thank you China.

China steps on the economic accelerator
China is cutting the amount of money banks need to hold in reserve, freeing those funds to stimulate their economy.

The People's Bank of China said Wednesday it will lower its reserve requirement ratio for financial institutions by half a percentage point. It was the first such cut in the ratio since 2008, and a change in course after the ratio was raised five times this year.

Obama Administration Announces New Details on Making Home Affordable Program

This is really a public service announcement. I hope it helps you, or maybe you can pass it long to someone who needs the information.

If you know anyone that actually received a new mortgage under the Making Home Affordable Program let us know.

My guess based on what I have hear, and from talking to mortgage bankers, is that this plan is going no where fast. I hope I am wrong.

Some the key points:

• The Second Lien Program announced today will work in tandem with first lien modifications offered under the Home Affordable Modification Program to deliver a comprehensive affordability solution for struggling borrowers. Second mortgages can create significant challenges in helping borrowers avoid foreclosure, even when a first lien is modified. Up to 50 percent of at-risk mortgages have second liens, and many properties in foreclosure have more than one lien. Under the Second Lien Program, when a Home Affordable Modification is initiated on a first lien, servicers participating in the Second Lien Program will automatically reduce payments on the associated second lien according to a pre-set protocol. Alternatively, servicers will have the option to extinguish the second lien in return for a lump sum payment under a pre-set formula determined by Treasury, allowing servicers to target principal extinguishment to the borrowers where extinguishment is most appropriate.

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• Hope for Homeowners requires the holder of the mortgage to accept a payoff below the current market value of the home, allowing the borrower to refinance into a new FHA-guaranteed loan. Refinancing into a new loan below the home's market value takes a borrower from a position of being underwater to having equity in their home. By increasing a homeowner's equity in the home, Hope for Homeowners can produce a better outcome for borrowers who qualify.
• Under the changes announced today and, when evaluating borrowers for a Home Affordable Modification, servicers will be required to determine eligibility for a Hope for Homeowners refinancing. Where Hope for Homeowners proves to be viable, the servicer must offer this option to the borrower. Note mine: I really have no idea what this means, if you do, hit the comments box.
• Continuing to bolster its outreach around the program, the Administration also announced today a new effort to engage directly with homeowners via MakingHomeAffordable.gov. Starting today, homeowners will have the ability to submit individual questions through the website to the Administration's housing team. Members of the Treasury and HUD staffs will periodically select commonly asked questions and post responses on MakingHomeAffordable.gov. To submit a question, homeowners can visit www.MakingHomeAffordable.gov/feedback.html. Selected questions from homeowners across the country and responses from the Administration will be available at www.MakingHomeAffordable.gov/asked-and-answered.html.

More detailed Information:

• To read the press release -- go here.
• Second Lien Program Fact Sheet
• Second Lien Program Case Examples

Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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A Vision for High Speed Rail --A Real Challenge for Change

When it comes to high speed rail, put me down in the plus column. I rode the Acela Express train from Washington, DC to New York more than 100 times. I really liked it, kinda sorta. The train does zip along nicely from north of Baltimore to Wilmignton, DE.  But after that, your are going the same old speed of any Amtrak train. Why? There is a speed limit and the tracks are antiquated.  At most you are going 95 miles an hour.  Meanwhile you can travel all over Europe and zip along at one and half times that speed all over the place. This is the American we live in today.

I am old enough to remember what it was like to drive from Philadelphia to Miami on the old U.S. Route 1. This was before Interstate 95.  It was grueling.

The idea of zipping along around a 180 miles an hour from Washington to New York does get me excited. Better yet, how about a bullet train from Allentown, PA to New York. A route like that would allow people to live in the country and work in the city.  The bullet train would make the Allentown-NYC commute shorter than the typical commute from Long Island to downtown NYC.

I can dream.

I will be keeping my eyes on the development of any high speed rail system. Why? Because high speed rail spells investment opportunity.

Just remember, people were afraid of electricity and the automobile when they were introduced.

Don't stick your head in the sand, or waste your time being a "nay-sayer". Think about profiting from change and innovation.

The video is worth watching. If you like text and need more color you can zip on over to the White House Blog and catch-- A Vision for High Speed Rail.

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

Kindle 2: Amazon's New Wireless Reading Device (Latest Generation)

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President Obama on G 20 and Global Economy

To prevent future crises, we agreed to increase transparency and capital protections for our financial institutions. We’re extending supervision to all systemically important institutions, markets and products, including hedge funds. We’ll identify jurisdictions that fail to cooperate, including tax havens, and take action to defend our financial system. We will re-establish the Financial Stability Forum with a stronger mandate. And we will reform and expand the IMF and World Bank so they are more efficient, effective and representative.

During the question-and-answer section, the President answered a concern on the minds of many:

QUESTION: What concrete items that you got out of this G-20 can you tell the American people back home who are hurting, the family struggling, seeing their retirement go down, or worrying about losing their job, what happened here today that helps that family back home in -- in the heartland?

PRESIDENT OBAMA: Well, as I said before, we’ve got a global economy. And if we’re taking actions in isolation in the United States but those actions are contradicted overseas, then we’re only going to be halfway effective, maybe not even half.

You’ve seen, for example, a drastic decline in U.S. exports over the last several months. You look at a company like Caterpillar, in my home state of Illinois, which up until last year was doing extraordinarily well. In fact, export growth was what had sustained it even after the recession had begun.

As a consequence of the world recession, as a consequence of the contagion from the financial markets debilitating economies elsewhere, Caterpillar is now in very bad shape.

So if we want to get Caterpillar back on its feet, if we want to get all those export companies back on their feet so that they are hiring, putting people back to work, putting money in people’s pockets, we’ve got to make sure that the global economy as a whole is successful.

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Frontline: Ten Trillion and Counting

All of the federal government’s efforts to stem the tide in the financial meltdown that began with the subprime mortgage crisis have added hundreds of billions of dollars to our national debt. FRONTLINE reports on how this debt will constrain and challenge the new Obama administration, and on the growing chorus on both sides of the aisle that without fiscal reform, the United States government may face a debt crisis of its own which makes the current financial situation pale in comparison. Through interviews with leading experts and insiders in government finance, the film investigates the causes and potential outcomes of—and possible solutions to—America’s $10 trillion debt.

Airs on television and online starting March 24. Go here to check the schedule.

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Geithner Speaks: My Plan for Bad Bank Assets

No crisis like this has a simple or single cause, but as a nation we borrowed too much and let our financial system take on irresponsible levels of risk.

However, the financial system as a whole is still working against recovery. Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions -- so-called legacy assets -- are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers.

Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.

The funds established under this program will have three essential design features.

• First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors.
• Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments.
• Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

Our goal must be a stronger system that can provide the credit necessary for recovery, and that also ensures that we never find ourselves in this type of financial crisis again. We are moving quickly to achieve those goals, and we will keep at it until we have done so.

Read the entire Geithner statement.

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Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now

Obama on 60 Minutes

President Barack Obama is going to appear on 60 Minutes tonight. After the show airs you will be able to get both the text version and the video version of the show right here on All American Investor.

Here is a taste from tonight's 60 Minutes interview with Barack Obama.

• On Vice President Cheney's recent remarks:

  "How many terrorists have actually been brought to justice under the philosophy that is being promoted by Vice President Cheney? It hasn't made us safer. What it has been is a great advertisement for anti-American sentiment."

• The president acknowledged his need for the support of Wall Street for his banking plan that he will reveal next week.
• The president even joked that were Geithner to tender his resignation, he would say, "Sorry, Buddy, you've still got the job."

Come back after the 60 Minutes interview airs for all the details.

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Bernanke Says Overhaul Regulatory System

"Government rescues of too-big-to fail firms can be costly to taxpayers, as we have seen recently," Bernanke said. "Indeed in the present crisis, the too-big-to-fail issue has emerged as an enormous problem."

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Overhaul Regulatory System, Bernanke Says

(AP) America's financial regulatory system must be overhauled to strengthen oversight of banks, mutual funds and large financial institutions whose collapse would put the entire economy in peril, Federal Reserve Chairman Ben Bernanke said Tuesday.

"We must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components," Bernanke said in a speech to the Council on Foreign Relations.

In his most extensive remarks on the subject, Bernanke built upon previous suggestions to bolster mutual funds and a program that insures bank deposits - and repeated his call for Congress to create a system to cushion fallout from the failure of a big financial institution.

The Fed chief's remarks come as the Obama administration and Congress are starting to crafting their overhaul strategies. For the administration, critical work on that front will be carried out among global finance officials this weekend in London. That will help set the stage for a meeting of leaders from the world's 20 major economic powers in April.

Revamping the U.S. financial rule book - a patchwork that dates to the Civil War - is a complex task. Congress, the administration and the Fed are involved because they want to strengthen the system to prevent a repeat of the financial crisis - the worst since the 1930s- that has plunged the U.S. and many other countries' economies into recession.

Bernanke said the U.S. recession could end this year only if the government is successful in getting financial markets to operate more normally again. The recession, now in its second year and already the longest in a quarter-century, has turned out to be more severe than the Fed had anticipated, he acknowledged in fielding questions after his speech.

To guide the regulatory overhaul, Bernanke laid out four key elements. One is for Congress to enact legislation so the failure of a huge financial institution can be handled in an orderly way - similar to how bank failures are handled by the Federal Deposit Insurance Corp. - to minimize fallout to the financial system and to the national economy.

Moreover, such "too big to fail" companies must be subject to more rigorous supervision to prevent them from taking excessive risk, Bernanke said. The Fed is trying to identify "best practices" that can help companies detect trouble spots and best manage their risks.

The government over the past year has been forced to rescue major financial companies so interwoven with other players and the global financial system that their collapse would put the entire economy in danger. The bailouts of insurance giant American International Group Inc., Citigroup Inc., Bank of America Corp., and mortgage finance companies Fannie Mae and Freddie Mac have put billions of taxpayers' dollars at risk and angered the American public.

"Government rescues of too-big-to fail firms can be costly to taxpayers, as we have seen recently," Bernanke said. "Indeed in the present crisis, the too-big-to-fail issue has emerged as an enormous problem."

Bernanke also said the nation's financial plumbing - the infrastructure and policies that govern financial transactions- must be strengthened to ensure that it will perform under stress.

Policymakers should consider ways to bolster money market mutual funds that are susceptible to runs by investors, he said. One approach would be to impose tighter restrictions on the financial instruments that money markets can invest in. Another idea is to develop a limited system of insurance for funds that seek to maintain a stable net asset value.

In addition, Bernanke called for a review of regulatory policies and accounting rules to make sure they don't "overly magnify the ups and downs in the financial system and the economy." For instance, he suggested that a larger financial buffer to support the FDIC's insurance program for bank deposits be built up during good economic times so that it could be drawn down when conditions worsen.

Finally, the government should consider creating an authority specifically responsible for monitoring financial risks and protecting the country from crises like the current one. Some in Congress - and the previous Bush administration - have proposed that the Fed take on this role of super financial cop.

As a lender of last resort to troubled financial companies, the Fed already has a major role in trying to put out financial fires.

"Effectively identifying and addressing systemic risks would seem to require the involvement of the Federal Reserve in some capacity, even if not in the lead role," Bernanke said.

Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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More from All American Investor

• Systemic Risk Defined--Too Big to Fail


• Ray Dalio on the current state of affairs in the market


• Roubini Predicts U.S. Losses May Reach $3.6 Trillion


• Six Errors on the Path to the Financial Crisis


• Who Caused the Financial Crisis?


• Option ARM--The Toxic Mortgage


• Debt Binge--The Perfect Financial Storm


• Warren Buffett's Annual Letter to Investors (Cliff Notes Version)

Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now

A conversation with Treasury Secretary Timothy Geithner

The following interview with Treasury Secretary Timothy Geithner was performed by Charlie Rose.

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Bob DeMarco is a citizen journalist, blogger, and Caregiver. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now

Buffett Inflation has the "potential" to be worse than the 1970s

He added that inflation “has the potential” to be worse than the double-digit rates of the 1970s. “It depends on the wisdom of our policies, what we do with” new government spending. Buffett said that Republicans need to stand behind the Obama administration, but Obama and Democrats should not use the crisis “to roll Republicans.”

Other highlights:

• The economy "can't turn around on a dime" and a turnaround "won't happen fast."
• Five years from now, the economy will be running fine. The strength of the American system will pull it through, just as it has many times in the past.
  
• Democrats and Republicans should work together and not try to take advantage of the economic situation to achieve partisan goals.
• Inflation has the "potential" to be worse than the 1970s.
• Most banks are in "pretty good shape" and can "earn their way out" of the current problems given the low cost of funds. Banks, however, "need to get back to banking."
• Extremely important that the government make clear depositors won't lose their money if banks fail. Obama needs to make a "clear statement" in support of the banking system.
• Berkshire is restricted from buying more American Express stock, but that doesn't mean it is not a "hell of a buy" at $10 a share.
• Wishes he had written the New York Times "Buy American" piece a few months later, but stands by the basic argument that you'll do better over a ten-year period with stocks that you will with Treasuries. He said in the article he wasn't calling the bottom of the stock market, and he still isn't.
  
• Buffett says derivatives are not "evil" and to be avoided at all costs, but they are "dangerous" and should be used very carefully. He still expects to make money on the long-term "put option" equity derivative contracts Berkshire has written.
• Housing market could work through, or "sop up," its excess supply in as little as three years if new construction is reduced to a level below natural population growth
• The U.S. economy was not a "house of cards" over the past ten years, but mistakes were made when it came to borrowing money.
• Mark-to-market accounting should be retained, but regulators shouldn't use it so much to require insitutions to increase their reserves.
• "Probably the uptick rule" is a good idea.
• Mistake to "demonize" corporate executives for using private jets. Having a jet has helped Berkshire make deals in the past.
• Praises Ben Bernanke's leadership as Federal Reserve Chairman.

Warren Buffett to CNBC: Economy Has "Fallen Off a Cliff"

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Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Asociate Director and Limited Partner at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, BlogCritics, and a growing list of newspaper websites (15). Bob is actively seeking syndication and writing assignments.

60 Minutes Your Bank Has Failed What Happens Next?

60 Minutes Gets A Rare Look At How The FDIC Takes Over Banks And Reassures Depositors

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(CBS) As staffers of the Federal Deposit Insurance Corporation enter the Heritage Community Bank on a Friday night - surprising employees with the news they are taking over the failing institution - 60 Minutes cameras and correspondent Scott Pelley are there to report on a process that's happening more and more in a foundering economy.

Pelley's report, including an interview with FDIC chair Sheila Bair, will be broadcast this Sunday, March 8, at 7 p.m. ET/PT.

Bair says 25 U.S. banks failed last year and expects many more this year. "It's going up. There have been 16 already now," she says. 60 Minutes was there for one of the latest ones.

On Friday evening Feb. 27, 60 Minutes recorded the arrival of the FDIC team as they entered Heritage Community Bank in Glenwood, Ill. The employees reacted mostly with shock and dismay. "I would say a large majority of the employees don't know that the bank is in trouble and is about to close until we walk in the door," Arthur Cook, the FDIC supervisor of the Heritage takeover, tells Pelley.

Heritage Community operated for 40 years, had 12,000 deposits totaling more than $200 million and was warned by the FDIC and Illinois state banking regulators more than four months ago that it was in trouble due to bad real estate loans. The FDIC takes total control. "We have accountants, asset specialists who specialize in loans…the physical facilities," says Cheryl Bates, the FDIC’s closing team manager. "We have a group of investigators that come in and do a review on the reasons of the bank failure."

Cook and Bates work for the FDIC's Division of Resolutions and Receivership.

Then they alert the media and the bank opens the next day, in this case under the name of the new owner, MB Financial, which bought the bank in a secret auction. This is one of the ways that the FDIC takes over a bank; in other cases, it may close the bank and pay off depositors or it may choose to run the bank itself.

The next day, the doors open, and as 60 Minutes cameras roll, anxious customers - including one carrying an empty briefcase - came into the bank. Only one withdrew a great deal of her money. The man who intended to close his account left with his valise empty, satisfied that the bank was in good hands. MB Financial is now in control and it's almost as if nothing happened. "Almost nothing did happen," says MB's CEO Mitchell Feiger, there to greet his new customers. "It's the same products, the same services, it's the same people taking care of the same customers."

The cost to the FDIC insurance fund of taking over Heritage and making a deal with MB Financial to buy it could end up costing $41 million and none of that money comes from taxpayers. "It is money from our reserves…and we are funded by insurance premiums that are assessed on banks," says Bair.

Asked why large, troubled banks like Citibank can't be saved by the FDIC and must rely on taxpayer bailouts, Bair explained that the FDIC deals only with federal or state chartered depository institutions.

She would not comment specifically on any bank but said "[these institutions] are really very large financial organizations….it's more than a bank. It's a broker dealer. It's offshore operation. It's foreign deposits," says Bair. Companies like Citigroup are large holding companies, with a variety of assets operating around the world.

She says because of this, there is no equivalent resolutions procedure to what the FDIC currently does that could encompass such an broad-based financial company with so many entities.

But Bair believes Congress should consider whether to let such banks get so large. "I think taxpayers rightfully should ask, that if an institution has become so large that there is no alternative except for the taxpayers to provide support, should we allow so many institutions to exceed that kind of threshold?" she asks.



Produced by Henry Schuster

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Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Associate Director and Limited Partner at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

More from All American Investor

• Systemic Risk Defined--Too Big to Fail


• Ray Dalio on the current state of affairs in the market


• Roubini Predicts U.S. Losses May Reach $3.6 Trillion


• Six Errors on the Path to the Financial Crisis


• Who Caused the Financial Crisis?


• Option ARM--The Toxic Mortgage


• Debt Binge--The Perfect Financial Storm


• Warren Buffett's Annual Letter to Investors (Cliff Notes Version)

Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now

Americans Falling Behind on Mortgage Payments

I really believe that part of this problem that has been caused by the Federal government. Many Americans were lead to believe that in order to get bailed out they needed to get into foreclosure. Much of the talk back in September and October was about saving the butts of investors that were screwed by mortgage bankers. As it turns out, the plan to save homeowners--Mortgage Modification Plan--Making Homes Affordable--is not going to help speculators, or those who bought second home for "investment purposes".

A record 5.4 million American homeowners were either behind on their payments or in foreclosure at the end of 2008.

That translates to almost 12% of mortgage holders. The biggest increases in loans 90-days past due were in Louisiana, New York, Georgia, Texas and Mississippi. No California or Florida. I guess they beat everyone to the "punch" in these states.

Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Associate Director and Limited Partner at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now

Is Principal Reduction or Refinancing the Answer to the Subprime Mortgage Crisis

The article presented below--Matters of Principal--is well written and thought provoking. The article addresses the current situation in the subprime mortgage market and proposed bailout of homeowners by the Obama administration. The authors make the case that refinancing won't work, and that the it would be cheaper and more effective for the Federal government to write down the principal on these distressed mortgages.

The reasoning behind the article is compelling and I can't say I disagree. I can say I think the approach the Obama administration is taking is more realistic and the best way to go in the current political and economic environment.

I believe most Americans are honest and they will ride out the drop in the value of their homes and make their mortgage payments. It is clear to me that a simple refinancing of the mortgage that allows them to continue to pay a more affordable amount each month--is the best answer.

What leads me to believe that honest Americans will keep paying even though the value of their home is substantially under water? I did it myself and I watched my neighbors do it while I was living in Texas. I bought a house in 1982 and then the price started dropping. It took more than 13 years before the house returned to my original purchase price. After 20 years, it was worth about 2.6 times my original purchase price. Here is the most important point--I only put five percent down when I bought the house. So, I didn't feel like I was losing much of anything while I lived there. I stayed because I needed a place to live, I liked where I was living, and I was honest.

At the end of 20 years my home was worth more than 40 times what I put down. My return on investment was excellent. This in spite of the fact that it was under water for 13 of those 20 years. The bad news--the home was located in Dallas Texas , not South Florida. Imagine how I would have been feeling in 2006 after owning that place for more than 20 years. The good news -- it has not dropped in value like a lead brick in the last few years. I no longer live in the house, rents have gone up in the last five years.

It is true that I could have walked away and rented cheaper. I didn't.

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Matters of Principal

By JOHN D. GEANAKOPLOS and SUSAN P. KONIAK

TO stanch the hemorrhage of foreclosures, we don’t need another bailout. What we need is a fix — and the wisdom to see what is in our own self-interest.

An avalanche of foreclosures is coming — as many as eight million in the next several years. The plan announced by the White House will not stop foreclosures because it concentrates on reducing interest payments, not reducing principal for those who owe more than their homes are worth. The plan wastes taxpayer money and won’t fix the problem.

For subprime and other non-prime loans, which account for more than half of all foreclosures, the best thing to do for the homeowners and for the bondholders is to write down principal far enough so that each homeowner will have equity in his house and thus an incentive to pay and not default again down the line. This is also best for taxpayers, who now effectively guarantee the securities linked to these mortgages because of the various deals we’ve made to support the banks.

For these non-prime mortgages, there is room to make generous principal reductions, without hurting bondholders and without spending a dime of taxpayer money, because the bond markets expect so little out of foreclosures. Typically, a homeowner fights off eviction for 18 months, making no mortgage or tax payments and no repairs. Abandoned homes are often stripped and vandalized. Foreclosure and reselling expenses are so high the subprime bond market trades now as if it expects only 25 percent back on a loan when there is a foreclosure.

The taxpayers need not and should not be responsible for making up the difference between the payments due bondholders before a loan is modified, and those due after modification. Why? Because the bondholders and the banks, the ultimate beneficiaries of homeowner payments, will be better off if mortgages are modified correctly and foreclosures stopped. The government “owes” them nothing more than that.

Why is writing down principal, which the Obama plan rejects, so critical to stopping foreclosures? The accompanying chart, courtesy of Ellington Management, an investment firm in Old Greenwich, Conn., tells the story.

It shows that monthly default rates for subprime mortgages and other non-prime mortgages are stunningly sensitive to whether a homeowner has an ownership stake in his home. Every month, another 8 percent of the subprime homeowners whose mortgages (first plus any others) are 160 percent of the estimated value of their houses become seriously delinquent. On the other hand, subprime homeowners whose loans are worth 60 percent of the current value of their house become delinquent at a rate of only 1 percent per month.

Despite all the job losses and economic uncertainty, almost all owners with real equity in their homes, are finding a way to pay off their loans. It is those “underwater” on their mortgages — with homes worth less than their loans — who are defaulting, but who, given equity in their homes, will find a way to pay. They are not evil or irresponsible; they are defaulting because — for anyone with an already compromised credit rating — it is the economically prudent thing to do.

Think of a couple with a combined income of $75,000. They took out a subprime mortgage for $280,000, but their house has depreciated to a value today of $200,000. They’ve been paying their mortgage each month, about $25,000 a year at a 9 percent rate including principal and interest. But the interest rate is not the problem. The real problem is that the couple no longer “own” this house in any meaningful sense of the word.

Selling it isn’t an option; that would just leave them $80,000 in the hole. After taxes, $80,000 is one and a half years of this couple’s income. And if they sacrifice one-and-a-half years of their working lives, they will still not get a penny when they sell their home.

This couple could rent a comparable home for $10,000 a year, less than half of their current mortgage payments — a sensible cushion to seek in these hard times. Yes, walking away from their home will further weaken their credit rating and disrupt their lives, but pouring good money after bad on a home they do not really own is costlier still.

President Obama’s plan does nothing to change the basic economic calculation this hard-pressed family and millions of others like it must make. The Obama strategy — which involves reducing their interest rate for five years and giving them, at most, $5,000 for principal reduction over five years — will still leave them paying much more than the $10,000 it would cost to rent.

And five years later, after the Obama plan has run its course, this couple will still not “own” this house. Those who accept an interest modification under that plan are likely to realize at some point that they are essentially “renting” a home and paying more than any renter would. Many of those families will re-default, and see their homes foreclosed.

Bondholders today anticipate making as little as $70,000 on a foreclosed home like that in our example. But consider how much might change simply by writing down the principal from $280,000 to $160,000, 20 percent below the current appraised value of the house. The homeowner might become eligible to refinance the $160,000 loan into a government loan at 5 percent, which would be impossible on the $280,000 mortgage.

Even if the couple couldn’t refinance and still had to pay the original rate of 9 percent, the payments would be reduced to $14,400 a year, considerably less than the $25,000 now owed, and no longer wildly more than renting would cost. And the couple would have $40,000 of equity in the house: a reason to continue to pay, or to spruce up the house and find a buyer. Either way, the original bondholders would have a very good chance of making $160,000, instead of the $70,000 expected now. Everybody wins.

If writing down principal is such a good idea, why aren’t banks and servicers (the companies that manage the pools of mortgages that have been turned into investment vehicles) doing it now? Many banks are not marking their mortgages down to the foreclosure values the market foresees, hoping instead that we taxpayers will buy out mortgages at near their original inflated value —another government bailout. Reducing principal would force them to take an immediate markdown, but a smaller one. The servicers, meanwhile, are afraid that bondholders, their clients, will sue them if they write down principal — a real prospect because the contracts that allow servicers to modify securitized mortgages put restrictions on the kinds and number of modifications they may make. Moreover, making sound modification decisions is costly; servicers don’t want to spend the money and lack the personnel to do the job.

Beyond all that, the servicers have a conflict that all but guarantees they will not modify loans to maximize bondholder value. Once a homeowner is in default, the servicer must advance that homeowner’s monthly payments to the bondholders, getting repaid itself only when the house is sold or the loan is modified. So cash-strapped servicers want to foreclose prematurely or do a quick-and-dirty modification (without due diligence and thus without considering principal reduction) to get their money back fast.

Paying servicers, these conflicted agents, $1,000 per mortgage to reduce interest payments, as the Obama plan provides, is a bad use of scarce federal dollars. Last October, on this page, we proposed that Washington pass legislation that would remove the right to modify loans or decide on foreclosure from the servicers and give it to community banks hired by the government. These community organizations would have the power to modify mortgages (including reducing principal) when doing so would bring in more money than foreclosure — particularly loans that are now current but are in danger of delinquency. Those now current would be presumed ineligible if they default before the trustees arrive to modify. Our plan is simple and would require little government spending, somewhere from $3 billion to $5 billion over three years, as opposed to the $75 billion or higher price tag for the Obama plan.

We know there are some who will be outraged at the idea that their neighbors might get a break, while they — so much more responsible — get nothing. To these outraged folks we say, you would benefit too. It is not just your home values and your neighborhoods that will deteriorate if you insist that your underwater neighbors not get relief; it is your tax dollars and that of your children that will be needed to make up for the plummeting value of those toxic assets held by banks, which we taxpayers now guarantee and may soon own outright. It is your job that will be at stake when your neighbors can no longer afford to buy goods and services, causing more companies to cut jobs. So you need to act responsibly again, for your own sake and for the welfare and future prosperity of the entire nation.

John D. Geanakoplos is a professor of economics at Yale and a partner in a hedge fund that trades in mortgage securities. Susan P. Koniak is a law professor at Boston University.

Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Associate Director and Limited Partner at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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• Systemic Risk Defined--Too Big to Fail


• Ray Dalio on the current state of affairs in the market


• Roubini Predicts U.S. Losses May Reach $3.6 Trillion


• Six Errors on the Path to the Financial Crisis


• Who Caused the Financial Crisis?


• Option ARM--The Toxic Mortgage


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• Warren Buffett's Annual Letter to Investors (Cliff Notes Version)

Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now

Mortgage Modification Plan--Making Homes Affordable

The Treasury Department released the guidelines of its mortgage modification today. The program will help up to 9 million homeowners avoid foreclosure. The guidelines will enable mortgage servicers to begin modifying mortgages right away. Please note: the Treasury program also includes incentives for removing second liens on loans.

You can follow this link,
Making Home Affordable , and find the links to self assessment questionnaires and contact information.

Or hit these links:

• Do I qualify for a Making Home Affordable refinance?
• Do I qualify for a Home Affordable Modification?

Here is the link to the main website Financial Stability.gov. The links below lead to the detailed information (PDF format):

• Summary of Guidelines
• Modification Program Guidelines
• Counselor Q&A
• Fact Sheet
• Borrower Q&A

Ok, you are good to go. Good luck. If you found this information helpful let us know.

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Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Associate Director and Limited Partner at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

More from All American Investor

• Systemic Risk Defined--Too Big to Fail


• Ray Dalio on the current state of affairs in the market


• Roubini Predicts U.S. Losses May Reach $3.6 Trillion


• Six Errors on the Path to the Financial Crisis


• Who Caused the Financial Crisis?


• Option ARM--The Toxic Mortgage


• Debt Binge--The Perfect Financial Storm


• Warren Buffett's Annual Letter to Investors (Cliff Notes Version)

Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now