What the Bailout Got Wrong

I am sorry. I owe the entire Country an apology. I believed the rhetoric of the bailout as a "necessary evil to stabilize our markets." I was wrong. All we did was reward the scoundrels who brought us to the brink in the first place. Anyone read msnbc today? Check out http://www.msnbc.msn.com/id/29879463/ if you want to make your blood boil - $724,000 just as a "retention bonus" to one of the bozos who help create this mess.

The *right* way to do the bailout (if any at all) would have been to pay off the troubled mortgages at the root of it all, with the proviso that no such mortgages would be offered again, or demanding they be converted into fixed-rate mortgages at a rate based upon current market value of the homes (with the lender and not the homeowner eating the loss). The banks would get some money, it would free up credit, and it would help out individuals as well as the bankers. Stabilizing the economy has to start in the millions of American households - not at One Wall Street.

New Rules:
1. Banks cannot sell mortgages to other banks or services for at least two (or maybe more) years after creation of the loan. This one simple provision would probably have prevented the whole mortgage mess. No one will write a loan they figure they will get stiffed for. They just didn't care - the originators of the loans sold them to someone else.

2. Mortgages must be underwritten in their entireity. They can be bundled together in groups, but they can not be carved up and split. No one in their right mind would have insured some of the crazy mortgages that were underwritten. It became too hard to tell what was real and what was not.

3. No more "stated income" mortgages. People need to provide documentation of their assets and earnings, and it needs to be verified. Why would anyone even *offer* such a mortgage? It is nothing other than an invitation to be defrauded. Oh, wait, I forgot. They would get "defrauded," but they would sell that loan off to another servicer while Wall Street sliced and diced it into a "credit default swap" combo. Who are the real criminals commiting the fraud?

4. No more "balloon" or "ARM"-style mortgages. These are invitations to default. If people could barely afford the terms before the rate adjustment, how could they afford them after.

5. No more refinancing your loan (as a purchaser) for a minimum of five years. Most consumers won't commit to terms that they can't pay for. Many people were suckered into predatory mortgages with lines like "well, you pay on time and you can refinance into a nice fixed-rate in a year or two." If people knew that they couldn't refinance for a long time, they'd be more likely to buy what they could afford in the first place.

6. No more multiple loans (like the 80/20 loans used to finance the "no money down" properties). This is just crazy, and hides the true amount of the debt (as well as the risk). If you as a lender think a single loan for 100% of the purchase price is too risky to underwrite, you are probably right!

7. No more "pick-a-pay" mortgages, which allow people to pay less than the minimum, and then capitalize the rest. These are even worse than the ARMs. Such loans encourage people to get themselves in deep. They're a financial time bomb. Of course, with rules 1 and 5 in place people would have to be smoking crack to sign anything like these.

8. No more "penalty interest rates" or rates based upon "creditworthiness." If you are creditworthy enough to purchase a house and get a mortgage, you should get the same rate as anyone else regardless of your credit score. The corollary: people in financial trouble do not have their ability to pay improved if you raise their interest rate through the roof for a late payment.

9. No more builder-owned mortgage companies. These are an invitation to defraud. The exception I would grant here would be to mortgage companies aligned with the builder who agree to hold the loans for several years. If they have to service the loan they will be as afraid of default as any other lender.

10. No more homeowners buying homes they really can't afford, and then saying, "Gee, I didn't really read the contract." I have more sympathy for first-time buyers than most, but homeowners need to bear their share of the responsibility. Protect yourself, work the numbers for yourself. Get a friend to help you. But don't just shrug your shoulders when you're making the biggest investment of your life and hope the lender and the seller will look out for your interests - surprise, they won't!

Larry