Piggy banks all in a row via Daniel Y. Go.

Ex-Mr Prop used to be a broker, now he manages money for rich widows. This AM he was yelling at the TV about the bailout and said that he had an idea to help mortgage payers stay in their home, provide a transparent way of valuing mortgages and give the Gov’t the ability to recoup all the cash it is going to pump into the system. I suggested he write it up. To my surprise he has done so.

A Mortgage Workout for the People (citizens) of the USA

This is a suggested plan to help every citizen of the USA whose current mortgage obligation exceeds the value of their primary home.

Principle no 1.: No household should pay a housing cost (mortgage payment – principal + Interest) that exceeds 30% of their gross income( before any deductions) as reported on their latest Federal Tax Return.

Principle no 2: The Federal Government will refinance through Fannie Mae and Freddie Mac(buy existing mortgage and reissue a new mortgage to homeowner) existing homeowners who are under water with their mortgage on primary residences.

Principle no 3: New mortgages issued under this program, based on household ability to pay, will contain a provision that allows FNMA/FHLMC to recover on sale of secured property, 80% of the difference between the nominal value of the new mortgage issued and the then sale price of the property, until full amount of original refinanced mortgage is recovered. These agencies be allowed to charge a 0.5% fee in addition to 30yr treasury rate to cover cost of implementing program.

Principle no 4: FNMA/FHLMC be allowed to continue to repackage these new mortgages in CMO’s etc for resale through traditional resale channels.

FUNDING for this Program:

Congress will appropriate $700 billion as additional funding to enable FNMA/FHLMC to implement this program, in a separate segregated Federal Reserve administered fund that cannot be invaded by Congress. Chairman of Fed to be responsible for disbursement and oversight of the program through FNMA/FHLMC so co-ordination with Monetary policy will be maximized. Reporting to Congress on program status twice a year.

Benefits:

a. Current law-abiding households who are current on their mortgages and are seeing negative real value of their primary residence will be able to remain in their homes at affordable cost with a potential for some upside appreciation in the value of their property and a participation in the realization of that potential together with Govt on sale of their property.

b. Banks and other mortgage owners will have a value, real and ascertainable, assigned to each and every such distressed mortgage AND they will have, therefore a viable asset to sell to mortgage repackagers on Wall Street; this frees up capital to lend out on new mortgages under more appropriate terms (20% downpayment, 30% max housing cost : household income)

c. Government gets a real, visible path to recovery of money appropriated to this program, with interest.

d. Government will be helping citizens who most need help and restoring their confidence in The American Dream.

e. Government will restore confidence in the banking system worldwide by establishing a system of mortgage valuation that establishes a valuation methodology that could easily be cloned by private investors and capitalized on by the Financial Services industry worldwide.

f. Bankers and other lenders will now have a method of assessing the value of collateral offered interbank and lending between institutions currently effectively at a standstill can be reinvigorated.

g. No new government burocracy needed. FNMA/FHLMC become effective arms of the Federal Reserve who is charged with housing stability as a third mandate.

To do anything other than a clean fix aimed laserlike at the problem of home valuation is to charge the country headlong out of the current recession into a second Great Depression of unimagined magnitude and consequence.

EXAMPLE: John Smith Family owns a house with a current mortgage of $700,000. It is their primary residence (they live in it).Smith household income reported on 2007 Federal tax return was $125,000 gross before any deductions (ie NOT their taxable income). Current US 30 year Treasury notes have an interest rate of 4.125%. Principle no 1: 30% of $125,000 means Smith can afford to pay no more than $37,500 per year or $3,125 per month for Principal & Interest on the mortgage. Smith gets a new mortgage under this program with a 30 year term at 4.625% (4.125+0.5) for a nominal value of $600,000.(arrived at through DCF analysis based on what Smith can afford to pay). The Government gets the right to 80% of the difference between $600,000 and the original mortgage amount of $700,000 when the house is sold. Ten years from now Smith sells the house for $700,000He has paid about $2,900/month in interest for 10 yrs or $348,000 that has gone back into the US treasury.He has paid about $27,000 in principal. He owes $573,000 on the new government mortgage, and $100,000 difference between his old and new mortgage originally financed by the US govt.

His gross profit on the sale of his house is $127,000. He owes 80% of this or $101,600, under his mortgage contract so that the Government gets its $100,000 back and $1,600 more.

Smith has had his property written down to a reasonable value and his mortgage therefore becomes valuable in a resale. Banks can resell it or if they wish sell it to FNMA in the regular course of business. Smith has lived with a new lower payment and still got the tax deduction for interest. He has made a profit on the sale of the home.

Most importantly, Smith is not tempted to hand the keys of the house to the bank because he is upside down in the mortgage. The Bankruptcy process is completely avoided.

There is a very real potential for gain by the government. Interest on mortgages comes into the Fed Reserve balance sheet. Potential for profit exists on sale of properties. No new government agencies need to be established..

The banking system is unclogged and consumer confidence is restored.

Ex-Mr. Prop

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