Mortgage Meltdown: Remedial Legislation

Mortgage Meltdown Remedial Legislation

Barney Frank has a good idea that will work. Mortgage notes must be reduced without penalty to borrowers, and of course continue the tax exemption for short sale. 

Cooperation will be needed by FDIC, Federal Reserve, SEC, FASB, IRS, Controller of Currency and Treasury Department. 

I would add the following AFTER reducing the mortgage by a flat percentage (because it will take too long to figure out 10 million mortgages on a case by case basis):

 

  1. Contingent reverse amortization (betting that housing prices will recover particularly in the event that this plan is put into effect). 75-25 in favor of homeowner up to recovering value of home at time of purchase. Then 75-25 in favor of Lender over purchase price until full value of mortgage is covered. Encourages homeowners to stay in their homes instead of abandoning them. Covers 8.8 million homes instead of 1 million.
  2. Allow contingent equity to reported as actual capital for lenders. Allows capital requirements and reserves to be met and allows further lending, increasing market liquidity in the credit and money markets.
  3. Allow contingent equity to be reported as footnote capital for investment banking. Allow financial institutions to recover write-downs and avoid additional write-downs.
  4. Allow contingent equity to be capital for CDO holders, including where used as collateral.
  5. Use flat relief percentage unless hardship is demonstrated. HUD has hearings. Suggested decrease in mortgage debt 20%.
  6. Use Fed Funds rate plus 1% as interest rate, 30 year amortization fixed. 3 point service fee that can be paid up front or 5 points if added to note. This applies to all mortgages. Opt-out provisions can apply for those homeowners who wish to opt out. Many will do so rather than go through the hassle of adjustment, even though most of the work will be done by lender.
  7. 1 year moratorium on all foreclosures on primary residential dwellings, giving time for mortgages to be converted.
  8. 2 month moratorium on payments of principal and interest on primary residential dwellings. Insurance and Taxes must still be paid. Borrowers given up to an additional 6 months to bring their escrow accounts for insurance and taxes up to date.
  9. After 1 year moratorium, foreclosures resume only on those homes where the mortgage note has been reset, as above, and borrower has defaulted. 
  10.  After 10 years original mortgage and note reinstated, adjusted for payments as above.
  11.  On second homes provide relief, by half of the above, and after 5 years original terms reinstated. 
  12.  Credit cards: Remedial cap on interest at 15%
  13.  Credit Cards: If interest rate is already 15% or under, reduce the rate by 25%.
  14.  Cap overdraft, bank fees etc. at 60% of current industry rates. 
  15.  Payday advance: cap fees, costs and interest at 10% per month. Require payroll deduction for repayment over maximum of 10 weeks.
  16.  Establish aggressive regulatory environment wherein the ultimate holders of risk (CDO owners) are educated as to actual quality of the mortgage-backed securities. This would include indexes identifying subprime loans, subprime borrowers, and various levels of prime borrowers statistically, so that ratings agencies, insurers, investors, fund managers, CFO’s and Treasurers can properly evaluate the risk of the investment. 
  17. This uses full information to allow market forces to dictate the credit liquidity offered to home buyers and other consumer debt. In other words, if the buyers of CDOs had been told the truth about these mortgage backed securities, and other aggregate derivative investments, neither the ratings  nor the demand for them would have been nearly as robust. 
  18. The meltdown would never have occurred. instead the incentive was to put out as many mortgage loans as possible, artificially inflated prices, because the lenders, closing agents, appraisers etc., were all incentivized to appease the confusion and worriers of the borrower and get the borrower to sign papers.
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