Mortgage Meltdown: Credit Union and Community Banking is the Answer

Thank you all for your comments and suggestions. Very good thinking going on out there. The Garfield Handbooks will be completely ready to start downloading in about 3 weeks. I’ll keep you advised. We will be taking PayPal, Visa and MasterCard. Possibly American Express and Discover as well. We are presented with two issues that are sucking the economic and social life out of local areas and channelling the money into the hands of a few people. It is no accident that real estate in New York City is booming. That is where all our money went. And it won’t be any surprise when the market crashes there either — when it comes time to answer for what they did.In a fax and mail transmission to the governors, attorney generals, and local government officials of many states, combined with a cross country tour to meet with them, I am proposing plans for the establishment of two non-federal interstate agencies: The Interstate Finance Commission and the Interstate Currency Network. If we can get some traction on these programs, we can mitigate the dangerous, probably catastrophic effects of the credit crisis and mortgage meltdown on the local level. 

The first thing we have to do is freeze the entire legal process of foreclosures, with certain exceptions that have nothing to do with the predatory and deceptive practices employed to impoverish and enslave the middle class. 

The second thing we have to do is set up emergency regulations creating a new instrument that will replace the mortgage and note that currently exists on most homes that were purchased in the last 6-7 years. This instrument would provide for payments of interest and principle on a sliding scale, payments of utilities and other maintenance expenses of the home, and a commitment to remain in the home for at least 5 years. The instrument, technically dubbed a reverse negative adjustable rate collateralized debt obligation, would allow the lender or source of funds or holder of the risk to participate in the appreciation of the real estate on any amount of proceeds of sale or refinance over the original purchase price expressed in today’s U.S. dollars adjusted for an average of government indexed inflation and real inflation. 

The arrangement would last for a maximum of 10 years after which the deal would revert to the original contracts and instruments, with the right to enforce. The assumption here is that normal demand-pull will increase value and prices in real terms such that the actual value of the real estate is in excess of the original purchase price. This would eliminate write-offs for holders of CDO’s and an opportunity for everyone to recover their current paper losses. The program would be retroactive to January 1, 2007. No participant would be subject to criminal prosecution, civil claims or damages. (Amnesty program, because the perpetrators are participating in the solution).

The third thing is to set up new regulations providing for accountability and meaningful enforcement and penalties to lenders, title companies, mortgage brokers, appraisers, investment bankers and retail securities brokers for non- disclosure and participation in kickbacks, rebates or sharing in yield-spread premiums. as well as inflating prices and approving loans based upon the ability of the lender to earn a fee rather than the ability of the borrower to pay the loan.

The fourth thing is to enact emergency provisions that reduce the ability of credit card issuers to levy and enforce fees and usurious interest payments.

The fifth thing is to set up and order procedures that would enable community banks and credit unions to gain greater share of the market for deposits. Benefit programs for State and Federal Sources should be distributed into deposits to community banks and credit unions in a network that works much the same as present payment systems. Host computers could be established to to deliver benefits, but existing infrastructures of gateway, intercept and national network processing could easily handle this feature. Local money would be kept locally where it would be distributed. In addition, emergency enactment overriding the network prohibitions against use of terminals that emulate or duplicate ATM functions, such as Point of banking and Cashless ATM (dubbed ATM Scrip by some industry insiders) should allow local financial institutions to compete with larger institutions in providing convenient electronic access to cash for far lower costs. Current private network regulations require huge expenditures by community banks and credit unions to deploy ATAM technology which favors only the large institutions who lock out the small banks and credit unions from fairly competing with them.

Sixth allow small financial institutions to convert turnaway customers to prepaid cardholders. The logistics would be easy for any bank to do it. Allow outsourcing for program management and risk management vehicles. 

If a person does not qualify for a regular account, the FI could start one anyway. In the first permutation, they don’t give him the R&T, or the account number, and they don’t give him checks. They just give him a card. The account number is only known to the bank. If they want to include direct deposit, it might get a little more dicey but there is a digital field that identifies the transaction as check or EFT. The processor could simply deny all check transactions. In fact, the arrangement could be that that the employer gets the routing and transit and account number and the employee doesn’t. This could lead to further cross marketing products with the employer.

If the bank or a third party wishes to offer overdraft protection, this will require some technical changes but not much. The accounting for the overdraft and the automatic direct deposit repaying the loan can be handled by either an outsource provider or the bank’s processor. 

This gives the bank the opportunity to build relationships with both individuals and employers. Loans tend to become decentralized even they continue to use FICO, providing they emphasize face to face relationships which we all know reduce defaults. 

Later, when the portfolios are proven, an association could be formed that pools the risks of defaults and decreases the costs attendant to the creation, maintenance and expansion of the program. This association could be expanded into an EFT network and probably should be,  by simply making all participants automatic members of the network. 

On derivative security (distribution of risk) I would not throw out the baby with the bath water, although I certainly would not present it as an option at this time. But at some point, through CD’s that offer higher interest rates because of the higher profits in the local banks, or even an investment pool that is offered within each state, you satisfy the main purpose of decentralized banking — keeping deposits, loans, creation of money, and economic growth local. The argument that local economies had the life sucked out of them by big banks and big business is going to get a lot of traction right now even if there are some arguments against it.

By increasing revenues and decreasing risks, a rewards program could be established for saving on the issuance of prepaid cards. And local merchants could participate in a generic loyalty program associated with the local banks. Then of course we add the Cashless ATM, and we have a much more level playing field for competition between banks and credit unions and between small Financial institutions and large financial institutions. (By the way, in Nigeria and other parts of the world, the ATM Scrip ATM is the machine of choice, works very well, and the customers and merchants are very happy with it. See current issue of The Economist.)

The great likelihood is that the party is over for the credit card companies, the mortgage brokers, the appraisers, the construction lenders, the investment bankers and the retail brokerage companies. This plan, which requires very little tinkering with the technology currently in use is one step in the direction of recovering from the currency and inflation disaster that is already in process. 

More on the currency network in the next post.

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