In Part I, we demonstrated how the bank and insurance company have been writing off the same mortgage when writing down their own set of securities. (Each has a duplicate of the same mortgage security so the write down by the bank is also writing down the same mortgage for the insurance company too, and visa verse. A 35% write down by each is a combined write down of 70%.)
In Part II, we summarize the advantages of refinancing homeowner into a lower mortgage over bailing out the banks.
Here in Part III, will show you how to use these write downs to finance the homeowner and why it’s is so much more expensive it is to try an bail out the bank instead of the homeowner.
There are a number of advantages of bailing out the homeowner. The best part is that banks can simply pass-off the write-down they already made on the (mortgage) security. Banks need only credit this same write-down onto the homeowner’s mortgage.
This means no additional capital needed to refinance homeowners into lower mortgages. The bank can instead take these write-downs and use them like a new capital pool for lowering home mortgages. This ‘new capital’ could replace gov’t funding now slated to help pay-down the homeowner’s mortgage. (This saves gov’t from spending on both the bank and homeowner.)
If the bank made a 70% write-down on their securities (as in the example in Part I), they would pass off 40% of this onto the homeowner. The homeowner gets 40% knocked off from their mortgage. The bank gets Refunded the (30%) difference (between the 70%) write-down they took on the securities and the homeowners (40%) lowered mortgage.
It is nearly impossible to match each investor to their respective loan. So the simple approach would be to apply this industry wide offer of say a 40% write-down on all (underwater) homes (mortgages). The bank puts in 40% but gets back 100% on their security. This instantly converts the securities to their original price. These ‘toxic securities’ are now worth about 100% of their original face value. In short, it’s much easier to assess the homeowners ability to pay then it is to find a price at which investors will buy these securities.
There is another big advantage of this this approach: The lowered mortgage converts these write-downs into new spending power for the homeowner. The homeowner now has all this new found spending power. This transforms our struggling homeowners from banking-liability into America’s next wave of economic activity. It’s the ultimate stimulus package.
This may sound a little ambitious, but let’s compare it to the old TARP approach now being repackaged by Pres. Obama. Let’s first refer to Part I. Remember the huge debt reduction we saw when we combined the write-downs by the bank and insurance company? They each wrote-off just 35%, but combined, they equal 70%. Well, this added leverage will work against us when it’s reversed (as we see from the TARP approach).
This leaves us paying off 200% of the loan amount if we try and pay-off the banks’ entire ‘securities’ holding and then go and pay off the insurance companies ‘credit-default-swaps’ too. Basically, we paid off the same debt twice. Of course this will create inflation. You just doubled the money spent on the same product. And yet, this has not even touched the homeowner’s debt.
The homeowner’s mortgage is categorized as an entirely different debt altogether. This is why the gov’t has also set up a whole other fund to help homeowners. This leaves the gov’t trying to bailout the homeowner, the bank and the insurance company. Put another away, the gov’t is trying to pay off the same loan 3 times. This is why the bailouts have such little impact. Each dollar spent only covers one third, to one quarter of the total ‘paper’ debt rather than a dollar for dollar ratio like we would normally get with other debts.
Now contrast this to helping the homeowner. Make the mortgage affordable to the homeowner. This will automatically cover the bank and insurance companies debt. Helping American’s homeowner takes a fraction of the cost and yet everyone gets this instant performing asset instead of a crushing financial liability.
Yeap, this financial crisis appears to be more an accounting glitch rather than about falling real estate prices. The upside is that solving the crisis may be as simple as fixing this glitch. We can do this by simply refinancing the homeowner into a more affordable mortgage with the money the gov’t has already set aside - to be used by banks who are now working to do this anyway. The only difference now is that we can rest assured that this time, it will work.
These are some of the issues outlined in the book: ‘The Trillion Dollar Discovery.’
John ‘Raghu’ Giuffre is a NY Realtor (presently in Hawaii) who has worked with Guerrilla Economics on a new mortgage system that will help much of this real estate crisis. It was in outlining this mortgage program that many of the issues like those discussed above were discovered and became the book: The Trillion Dollar Discovery.
The book is available at lulu.com. Search under Trillion Dollar Discovery. Here’s the link:
http://www.lulu.com/content/paperback-book/trillion-dollar-discovery/6491549
There will also be information on our website: roopa.org.
Email:
buyraghu@yahoo.com For writing
