Economic Recovery for Dummies (bankers, government officials, etc.)!

March 13th, 2009 by thinkthenact

Before any Government Official or Multi-millionaire banker decides how best to recover from this economic downturn, perhaps they should sit down and read this simple manual on the easy way to a fast recovery named for them.

Problem - the drastic drop in housing values from foreclosures and economic slowing have caused a cascading freefall in the economy. So we need to take the foreclosures that are coming out of the picture, keep people in their houses and stop giving money to banks that have proven the inability to use it effectively.

Solution - Wipe out a large amount of foreclosures that will happen over the next 6-12 months and give people the chance to pay their debts in a resonable fashion. If you have a child who asks for money to get themselves out of trouble you would do your best to help, but if he comes back the next day and asks for more, you would be pretty dumb to give him more. Don’t just give money to the banks that are at the root of the problem. Here is the best way to accomplish the most with as little as possible.

STEP ONE - Use the funds that are given away to handle the problem quickly. Set up a fund administered by HUD to take that same money and purchase the bad loans from the banks.

  1. How to do it- Government tells banks that it will purchase owner occupied mortgage assets that are behind in mortgages or having trouble making payments (if you already foreclosed, too bad).
  2. Ask the homeowner to fill out an short one page application with current income situation (employed, out of work, etc) showing they want to stay in the home.
  3. These loans are purchased for 95% of the principal owed no matter how much the home is worth.
  4. Banks get 95% and release homeowners from any liability for additional principal or past due interest and payments
  5. Government takes the purchased loans (keeps the principal the same as was owed originally-100%) and instantly reduced all rates to 4.75% for 5 years.
  6. If one or more borrowers on the home is unemployed and collecting unemployment the payment is cut to 1/2 of the normal payment at the 4.75% rate for six months with the other 1/2 payment added to the balance due if and when the homeowner sells the home for a profit in the future. If in 6 months the borrower can show they are actively seeking employment and/or collecting unemployment they are given 6 more months.
  7. Since the government (by that I mean the citizens of the USA) will still have some losses from homes that continue into foreclosure the banks will still give a portion of equity in exchange for the purchase.

What have we accomplished?

  1. We have taken a large amount of the bad debts that are causing the banks to cling to their cash worried about the upcoming foreclosures in the next 6-12 months. This will allow them to get back to lending and spend less time worrying about how much their losses might be on the future foreclosed homes.
  2. We have taken a huge number of homes that would most likely have been in foreclosure in the next year off the market and kept people in their homes.
  3. By taking a large number of future foreclosures off the market and the bad debts from the banks the housing market will recovery and probably rebound a little bit within one year. There will be much fewer homes for sale and banks will be able to lend at wonderful low rates meaning prices will begin to rise (see basic Supply and Demand)
  4. Confidence in housing, and confidence in the future for Americans

STEP TWO - Regulate the banks to become banks again, not banks that also do financial services that mimmick hedge funds, VC, and other derivative investments. Banks are supposed to be efficiently run businesses that make very small margins (1-4%) on a huge amount of money. They do this by managing the spread between payments to depositors and other borrowing and the money charges for lending that money to others. When you take larger leveraged bets through product offerings and services within a low margin company any mistep is disaster. Most Credit Unions in this country are still run this way and in much better shape than most banks.

What have we accomplished?

We have taken steps to greatly decrease the chances of these kind of blowups in the future.

STEP THREE - Teach the bankers that helping borrowers manage their payments so they can collect is much smarter than raising rates trying to add as much charges as possible until borrowers are forced to default. Most people that I speak with from many different income brackets are fully aware and accepting of getting themselves into credit card problems, but the bank takes it from a problem and turns it into a insurmountable hurdle.

Example: Your were a little irresponsible and charged a lot on credit cards. You are able to keep up on payments but it sure is hard to get the principal down, well because you have so much debt (but not necessarily late payments) your credit scores have dropped so all the banks have decided to raise your rates. Now you cannot make even the minimum payment because you need to have a place to live and food to eat. The banks do this as a regular habit  - the logic being that a lower credit score means higher risk so they have to charge higher rates in order to make up for the other people who default on the debt.  How about making it possible for people to keep paying the lower rate (this would lower default rates).

  1. credit cards rates are not allowed to be more than 8% over prime. Anything higher is usury.
  2. credit cards late charges are not allowed to be more than $10.
  3. Banks and their affiliates are not allowed to have more than two credit cards issued to any one individual
  4. If they are a high risk loan by bank calculations don’t give them more credit.
  5. Set up a database where credit card companies will communicate about debts (government monitored and administered) Individuals can call in to get a loan with a fixed payment (from bank funds) that is managable and can pay off all credit card debts within a resonable time period, at a rate no more than that stated above. (outstanding late fees and crazy interest rates are taken out)
  6. The individuals will have restrictions on new credit cards and use until the loan is paid
  7. All card companies owed money will agree to the plan and will agree not to raise the rates above levels stated

What have we accomplished?

We have given individuals that are crushed by rising rates which make it harder to pay, which lowers their credit scores, which raises their rates to unmanagable levels an opportunity to get those debt paid down and make good on the money they have spent. We have given the banks a way to be more sure that the debts will be paid and what should be considered a very healthy rate.  This increases the bank profitability and ability to be more certain it will collect.  Thought - If someone owes me $100 at 22% that is too much for him to afford and someone else owes you $100 at 10%; Mine will probably default and yours will continue to pay, who is making the most money?

These steps above with a little more detail, of course, offers the quickest way to restore home values, keeps most people in their homes, allow Americans to responsibly pay their debts, which restores confidence and sparks economic growth. All this and the banks learn what banking really is again (assuming they knew in the first place), consumers are not given a free ride (just a fighting chance), if things get better we get a 5% profit on the paid amount, and the government (US citizens) will still have some ownership of the much more solvent and responsible businesses known and banks.

Either way wouldn’t we rather risk losing some money supporting citizens down on their luck, rather than flushing down the toilet on bank give aways?

Quotes to think about from author speaker Jim Rohn:

“It can be dangerous to weaken the strong in our attempts to strenghten the weak”

“Life is a unique combination of “want to” and “how to,” and we need to give equal attention to both”

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2 Responses to “Economic Recovery for Dummies (bankers, government officials, etc.)!”

  1. ec10teacher Says:

    some good stuff in here but a bit over the top. I expect FRESH ideas from this site and there are frest nuggets in here but too much of it is warmed over. I like the credit card points but try to make them more voluntary and more about information and less about regulation

  2. thinkthenact Says:

    I should probably note for any readers that I am (I will admit contrary to the regulatory suggestions above) a big free-market, capitalism, small government minded individual, but (yes, there is always a but) since the government is going to intervene anyway. Let’s make it effective, teach some lessons to executives that run banks, allow individuals to settle their debts responsibly, and take the shortest route to a stable market.

    Many of the banks don’t learn the lessons because they base all decisions on a predetermined formula and don’t know how to change. Let’s call it “Forced adaptation” The biggest problem is the people in charge have never personally sat down with a diverse group of people (one at a time) and seen the ups, downs, differences, and struggles they face over years of trying to help them as individuals. To banking a person is not an individual, they are a part of Group A or B and the tables say we raise their rates, or lower them. This as seen as the most efficient way to make decisions, but maybe the downfall of the information age is the decline of personal contact and caring.

    Useless stimulus continues: refinance help from the government allows people whose mortgages are Freddie/Fannie owned to refinance. The problem is that bankers and government officials (who almost always come from the banking world) choose to see things with blinders on. You still need to qualify for the new loan based on your income and debts. People who need it most will probably still be a little above the 31% housing ratio required, due to job cutbacks, unemployment, and their overall debt ratio will be worse because in order to survive they have incurred huge credit card rates. There is also a large percentage of loans that are owed by neither Freddie or Fannie. The simple fact is that every person handles their finances differently, some spend more outside of home and can only afford 20% some never go out and can afford 40%. We are beyond qualifying based on a narrow set of parameters. What we need is an affirmation from people that they do want to stay in their homes and at the lowered payment they believe they can continue to make payments.

    This is the land of opportunity and what we would be doing is giving Americans the opportunity to make good on their debts at a current rate (rates are in this range, if you can qualify). Let’s give them a chance (knowing that some are beyond saving) and prop up the economy in the process.

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