There isn’t really any bi-partisanship, but what if we took one repub idea and one dem idea and combined them. Start with this idea from repub Lamar Alexander:

… make 30-year mortgages with a fixed interest rate of 4 to 4.5 percent available to new homebuyers or existing homeowners who want to refinance. Alexander estimates the average homeowner would shave more than $400 a month off their mortgage under the plan.

I think the interest rate should be a bit higher, probably 5.5%, but we would extend the term somewhat if the borrower wanted to, which would also lower the payment. That might lower the amount of benefit somewhat, but will decrease the cost of the bill.

We combine this idea with a serious Chapter 13 cramdown bill. That bill just went through mark-up in the House, where several amendments were added, one of which requires the owner to share any gains in the sale of the home during the first five years with the lender. This bill currently calls for a market interest rate plus a "risk premium". We get rid of that to equalize interest rates. That seems fair enough.

Look what that would do. The cash from refinancings goes to the holders of the mortgage notes. Some of that money will go to banks that hold mortgages, and will add a good bit to their capital. Most of the money would go directly to collateralized mortgage obligations, those pools of mortgages that are sliced and diced. No consent is required of the owner investors. They get paid and they are out. I realize that a lot of these notes have huge prepayment penalties, so those just get trashed by legislation, or maybe we charge a small fee to the current holder for removing the risk they face. That will remove a big chunk of the collateral from the pools, and will leave behind the notes that have problems.

Those people who don’t meet the refinancing rules go to Chapter 13 and write down their mortgages to the then current fair value of their homes. That fixes their mortgages. As I have pointed out elsewhere, they should be able to make the payments because they are wiping out a lot of other debt in their bankruptcy.

Any mortgages which can’t be fixed by one of these methods is probably truly trash. That means that the fair value of the pool is the discounted cash flow from repaired mortgages plus a something for the actual value of the collateral in the trash. It should be a lot easier and cheaper to price this remnant, and it can be sold for whatever it will bring.

This will clarify the balance sheets of the giant banks. It doesn’t deal with the stupidly large credit default swap portfolios these dolts bought and sold. But it’s a good start.

Next, we evaluate the banks and their remaining portfolios. If the value isn’t there, we explain to the bondholders about their exchange of debt for equity. We offer several options, different combinations of common stock, preferred stock, or maybe some subordinated debt that would count as equity for regulatory purposes. Then, if the balance sheet isn’t going to work, we either close the bank or add capital in exchange for equity at a fair price.

Now let’s see how this looks to the public. Pretty much everyone who has a mortgage sees the monthly payment drop. For those who were able to make their current payment, it will be easier to pay other debts and maybe even put some aside for retirement or the kids education. The bankruptcy provisions make it possible for even more people to reorganize themselves, and thus survive this mess.

Every time I post something on the bankruptcy amendment, a couple of people point out how unfair it is. Here’s an example. Two families buy houses in the same neighborhood for the same price. One has overreached, overspent. Eventually they file Chapter 13, and cramdown the mortgage and the interest rate, and get rid of a bunch of other debt. Now they have their house substantially cheaper than the other family that did the right thing.

Under the bipartisan plan, the family that did the right thing also benefits, and can’t complain about the benefit to the other family. Both families are in better shape. Both are now able to contribute to the economy.

Finally, the government eventually will sell the refinanced mortgages. They should be clean, and easily priced. That makes the whole thing reasonably cheap, compared to some of the rest of the alternatives.

See, bi-partisan can be sensible.

masaccio

masaccio

I read a lot of books.

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