How FNM and FRE Can Help Solve The The Unemployment and Foreclosure Crisis
I want to discuss with you, a different approach to economic recovery. Normal capital markets did not cure the Great Depression of the 1930s and they cannot solve this economic crisis because collateral values have decreased so much and so many homes have underwater mortgages. It cannot be provided by the capitalist entity because it is still healing and will experience a relapse if interest rates continue to rise.
To solve the unemployment and foreclosure crisis and stabilize mortgage interest rates, we must start by doing two things.
First, we need to create a mortgage with terms that fit the current economic conditions.
The new mortgage I am proposing would improve the economy and the financial condition of Fannie Mae, Freddie Mac and the banks. I call it the 30 yr. 2010 STABILITY MORTGAGE. It would have a starting interest rate of 3% and increase 1/4% a year. (3% is currently more than 300% above the inflation/deflation rate. Mortgage rates have been historically 100% above the inflation rate. The current mortgage interest rate is over 500% above the inflation rate). The interest rate would cap out at 5%. The borrower would have to qualify at the 5% interest rate. Mortgages that are underwater would have their unpaid balance reduced by an amount equal to 20 to 30% of their monthly payment amount each month for 10yrs or until the mortgage equals the current possible sale price of the home. (Reducing the mortgage monthly by a small amount would be less of a loss than by reducing the mortgage by foreclosure or a short sale. It would also be better for the banks, investors and the homeowner.)
If FNM, FRE and the Fed said they would buy a mortgage with a 3% starting rate, the banks would offer it to the public. Temporarily, if necessary the US Treasury would buy the GSEs bonds. (Treasury would receive the money back when the Fed bought the MBSs from the GSEs) The banks would earn the fees for arranging and servicing the home mortgage. FNM&FRE would have less loses from foreclosures. They would be collecting interest on a larger mortgage than if they foreclosed or short sold the home. The securities the Fed currently holds would go up in value and should be sold to investors to reduce the Fed's balance sheet. The Fed would buy the new mortgage backed securities and sell them to investors, after home prices stabilized and the mortgage interest rate, on the new mortgage, had risen above the 10yr T-Bill rate.
Enacting the ZERO INFLATION TAXATION POLICY is the second thing we should do. This policy will help prevent another economic crisis similar to the one that we are currently experiencing. It would also create a stabile market for thirty year fixed rate mortgages.
Conclusion: Foreclosures should decrease if the mortgage reduction plan is put into effect and the mortgage starting interest rate is reduced to 3%. The homeowner purchasing power will increase by 50% of their monthly interest payment if their current mortgage interest rate is 6% or more the first year and then slowly decrease the following seven years. With increased consumer purchasing power, total demand would increase, there by employment would increase. The banks would become stronger because their customers would become financially stronger and the collateral for small business loans would be stabilized.
If you would like to discuss the Zero Inflation Taxation Policy or any other matter, I am available. Go to my web site for more information. www.economysflaw.wordpress.com/ Read Alternative Economic Stimulus Plan.
Leonard C. Tekaat is a retired economic analyst, economic scholar, businessman, financier, investor, author and former candidate for California Congress. I have over forty years in the financial world.
F&F are the last big guns the administration has to deal with the mortgage crisis.
The Fed isn't buying MBS anymore, so I'd look for something big proposals for F&F in the coming months.
The government didn't wipe out AIG's common equity.. Why would they with F&F - and how could they do it other than a US GSE filing for bankruptcy -- that would roil world markets something fierce. Am I missing something?
The Fed says they will stop buying MBSs. I think they are saying that because they have not seen any real improvement in the housing market. If mortgage interest rates look like they will rise and housing continues to slide, I think they will jump back in and start buying MBSs. If they see that the new mortgage terms will help the economy in general, I think they will re-start buying MBSs for sure. If the Fed starts tightening, we diffently will need to have the Stabiliy Mortgage or the economy will double dip.