Hussman's plan - Is anybody paying attention?

[quigleydoor]

What do you think of John Hussman's plan for assisting homeowners? Is this plan being considered by anybody in power?

There are essentially only two ways to restructure mortgages. First, if it were possible to collect all of the pieces of various securitized mortgage issuances at large discounts to face value (say 60 cents on the dollar), then the government could write down the mortgage principal by the same amount of that discount, with absolutely no cost to taxpayers. Essentially, the losses already taken by lenders and the owners of those mortgage securities would be “passed on” to the underlying homeowners in the form of mortgage principal reductions.

Aside from that, the most useful feature of government in resolving the foreclosure crisis is not its ability to squander taxpayer money, but its ability to provide coordinated action. I still believe that the best approach to foreclosure abatement would be for the Treasury to set up a special “conduit” fund to administer “property appreciation rights” or what I've called PARs.

Suppose a $300,000 mortgage is in foreclosure (or the homeowner and lender can agree to the following arrangement outside of foreclosure court). A reasonable mortgage restructuring might be to cut the principal of the mortgage to $200,000, and to create a $100,000 PAR. The homeowner would agree to pay off the PAR to the Treasury (and administered through the IRS) out of future price appreciation on the existing home or subsequent property. The homeowner would be excluded from taking on any home equity loans or executing any “cash out” refinancings until the PAR was satisfied. The maximum PAR obligation accepted by the Treasury would be based on the value of the home and the income of the homeowner.

The lender would receive not a direct claim on that homeowner, but a participation in the Treasury's “PAR fund” which would pay out proportionately out of all PAR proceeds received by the Treasury (technically, new shares in the PAR fund would be assigned based on a ratio reflecting the extent to which existing shareholders have already been paid off, so earlier shareholders don't receive more than they have coming to them).

Importantly, the Treasury would not guarantee repayment, but would simply serve as a conduit. There would be no “free lunch” at taxpayer expense. If the homeowner was to eventually sell the home and not purchase another, the obligation would become a low-interest loan obligation and would eventually be a claim on the estate of the homeowner, but with an initial exclusion at low income and a progressive recovery rate based on the size of the estate. The PARs would be tradeable, since they would be based on a single pool of cash flows, though they would almost certainly trade at a discount to face value. Assuming that the PAR obligations are fixed and don't increase at some rate of interest, then even if home prices were expected to take about 15 years to recover, the PARs would still trade at more than 50% of face. Given that recovery rates in foreclosure are running at only about 50% of the entire loan, it is clear that this sort of approach would be preferable to foreclosure in most cases. If it were available, lenders might agree to outright principal reductions as well in preference a costly foreclosure process.

This sort of approach would reduce foreclosures without relying on free money from the government, or violating contract law. The PARs would provide a legally enforceable, diversified stream of cash flows at far lower cost than individual lenders would have to spend to collect from individual homeowners. Since home sales are taxable events, the IRS would be in an ideal position to enforce these obligations.

Source: http://hussmanfunds.com/wmc/wmc090223.htm

[jimmygu3]

Re: Hussman's plan - Is anybody paying attention?

What do you think of John Hussman's plan for assisting homeowners? Is this plan being considered by anybody in power?

Source: http://hussmanfunds.com/wmc/wmc090223.htm

I don't know, but it certainly is reasonable. It may also need to be coupled with the bank agreeing to maintain the original interest rate. Otherwise you would have people who can't pay their $300k at 6%, but because their credit is shot the only option is $200k at 9% plus a $100k lien from the IRS.

[World Traveler]

Re: Hussman's plan - Is anybody paying attention?

Problem is that one way or another all Americans will end up paying for this fiasco.

For example, insurance companies and pension funds were big investors in asset-backed securities. So, in their role as taxpayer, the U.S. citizen may gain from above plan. But since their insurance companies and pension funds are taking the hit as bondholders, insurance premiums go up and their pension payouts decrease.

And since, at least up till now, the courts have ruled that, short of bankruptcy, state and local governments are obliged to honor pension promises to public employees, local taxpayers would have to foot the shortfalls in public pension funds.

Mutual fund bondholders would also take a hit in Hussman's plan, affecting holders of 401K's and other bond-like investments. Many are small savers in these bond mutual funds.

There are folks , particularly at the big Wall Street banks and investments houses, credit agencies, etc. who made a lot of money these last 6 years as this fiasco was building. And knew what the outcome would be, based on internal e-mails.

I've read that approx 60% of all the money made from 2002-2007 on Wall Street was paid out in bonuses.

First to bear the pain should be those who caused the mess. In my opinion, there should be some form of clawback, starting with 2002 Wall Street bonuses, particularly in the higher echelons of Wall Street. There's been a lot of fraud, and an effort should be made to uncover that fraud and get the money back. Also as an object lesson, so that it does not happen again.

Repealing the Bush tax cuts for the top 1% would also be helpful, since they've cornered the market on U.S. wealth, and there would be more funds to help those losing their jobs and savings.

Also a small transaction tax on Wall Street wheeling and dealing would help stem the bleeding in federal government deficit.

That would probably not be popular on an investment board, but heck, I pay taxes when I buy a TV or shoes, what is so different about buying and selling a stock or bond, a CDO, an MBS, etc.

The difference is that Wall Street has a lot of political clout and the local shoe store does not.

My gist is that the U.S. should try to lessen the fallout as much as possible for those with the least financial resources. The vast majority of Americans never made money in the game that took us to where we are now. They just paid their mortgage, their taxes, and went to work every day.