HOUSING BUBBLE FIX--fed second mortgages--jk

Political news--August & September of 08

HOUSING BUBBLE FIX--fed second mortgages--jk

Second deed solution to the housing crunch

A second deed to homeowners is much better then giving away the money to financial institutions. Suppose our government gave 10 million home owners a line of credit of up to $100,000. If the average borrowed by the home owner during this crisis is $50,000, then there would be a payout by our government of ½ a trillion dollars—much less than the proposed bailout. This line of credit to home owners would save the homes in arrears by permitting the home owners to continue paying monthly on their mortgage for a number of years. Moreover, the financial institutions would not be saddled with uncollected mortgage payments and foreclosed homes. Nor would the financial institutions be selling homes for less than the amount owed. The market would be solvent again and the home owners benefit. At the same time the U.S. government would hold a second deed.

The homeowners if their lot improves could pay off the debt to our government. Those who because of adversity stay in arrears, once they consumed their loan, would have the property foreclosed by the financial institution. But by now we may presume the housing market has rebounded and both the financial institution and the U.S. government have recovered the amount of their loans through the sale of the foreclosed property.

This of course is not favored by the financial institutions who would rather foreclose on the home and have our government give then a bail out. Nice having a rich uncle pay your losses at the race track. The government will give the institution bridge capital, thus when the housing market improves, the institutions will be making a profit on the foreclosed homes they are still holding. Unfortunately special interest come before the people, thus the best solution wont be passed by our government.

The debt game

The deceptive trick about raising the bailout money is that our government is not funding the bailout through budgets cut and new taxes, but rather by selling more treasury debt (t-bills,* t-notes, and t-bonds). Interest on the federal debt us now the second largest budget item after military spending.** T-notes and t-bonds are sold at a discount (below face value). They also pay a percentage interest collected every 6 months. This is money spent on interest in the U.S. debt is thus money flushed down the toilet, for it buys nothing we can use.

The down side to selling more bonds is that we and future generations are saddled with the interest unless they pay off the t-bonds and notes. Moreover, since they are sold at a discount, thus requiring the sale of an ever increasing amount to replace the old ones that have matured. Secondly for to sell the t-bills, they must be made attractive. This become ever more difficult given (1) the huge amount being sold monthly, (2) our ever increasing economic instability, which has been made ever more obvious through this market meltdown. To make the t-bonds attractive top foreign investors, they must promise a decent return which is accomplished two ways. Now favored is the falling dollar. The Euro has gone up nearly 50% this decade above the U.S. dollar. For the sake of clarity, I will use rounded figures. A European bank spends 1 million euros on t-bonds it will get $1.5 million in t-bonds (ten years ago the same amount of euros would have only bought $1 million in t-bonds). Then if now the trend has reversed and the dollar goes up so that 1 dollar = 1 euro, then they will have 1.5 million euros. The second way to make the next batch of t-bonds attractive would be to pay an even higher interest rate. Finally the t-bonds will be sold. If the latest batch won’t sell at the discount rate of 95% then the discount rate will drop. Thus a $1,000 t-bond requires only $950 dollars. If there aren’t buyers at that price the price will drop, until all of them are sold.

* T-bills are short term notes that are sold at a discount to face value; for example for $9,900 dollars and mature at $10.000. They are short term, from 1 month to 4 months.

T-notes mature in 2, 5, or 10 years, while t-bonds are from 10 t 30 years. 30-year bonds are issued quarterly. There are also the less significant series EE bonds and I Saving Bonds which are sold to the public.

**Social Security is a separate item. We pay a special tax that goes into the social security fund.