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Watching current events have been extremely painful
because, unlike the politicians, I know exactly what needs to be done,
having worked in the mortgage industry in the not too distant past and
possessing a brain rather than physical beauty and an addiction to cue
cards.
The problem is that:
1. The mortgages and mortgage-based investments, CMOs et al, are administered by profit-driven private entities;
2. Said entities find one excuse or another, the latest being Return on
Equity (ROE), to invest in their own high-risk instruments, this "no
no" is usually referred to as "buying your own junk", the tendency to
do so being a corollary of "Gresham's law"; and
3. When the
high-risk mortgages start to unravel during a real estate downturn, the
SOP of foreclosing at a drop of the hat becomes suicidal for a lender
because the collateral is no longer worth enough to cover the remaining
principal. Not even close.
My solution for this is to:
1. Form a new federal bank system, consisting of a central bank and
state-based banks whose scope is limited to financing businesses based
in the state and residents of the state, but wholly run by the federal
government and staffed with civil servants paid on a government scale
(GS).
2. Take over the administration of all mortgages,
including those recently foreclosed, reversing those foreclosures and
distributing to the state bank where the property is located. Also take
over all CMOs, most if not all being distributed to the central bank
due the multiple states involved.
3. Convert those mortgages to
Adjustable Equity Mortgages (AEMs) by reducing the remaining principal
proportionate to the reduction of equity, i.e. by current appraised
value divided by the sum of the down payment and initial principal. Some adjustment in the term (period of time over
which the mortgage is repaid) can be allowed, based on the borrowers
current capacity to pay, during this conversion process. The goal is to have mortgages which are either made "good" or, if irretrievably "bad", are truly backed by collateral. Even more simply, we should be avoiding a real estate "fire sale".
(1) removes the profit motive and focuses banking on the local economy.
(2) moves the administration of mortgages and mortgage investments into the public, civil service sphere.
(3) converts non-performing and failed mortgages into performing
mortgages and those from which current mortgage equity can be extracted
from a foreclosure sale. In the future, the risk and reward of equity moves is
borne both by lender and borrower proportionate to equity stake. This
makes for a much stabler instrument, albeit not fixed income. The prospect of a resurgence of real estate values encourages current investors to "hold" and other investors to buy under-priced AEMs.
The money spent in this effort would be for administrative costs, which can be recouped
through a modest fee. Also the apparatus allows for state and federal
deposits, i.e. endowments, to be used as a funding source for the low
risk investments, with the interest used to replace taxes and possibly
to forgo the administrative fee.
This is my fair, low-cost solution to the current financial crisis but is anybody listening? Does anybody ever really listen?
Thank you for reading,
Carl Peter Klapper
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