The global economic crisis became evident when at least these four things happened 1) adjustable rate mortgages (ARMs) began to adjust, 2) borrowers could not afford the mortgage payment after the ARMs adjusted, 3) non-payment of the mortgages dried up the cash flow from the borrowers to the lenders and 4) the securitized mortgage instruments lost their value as a result of the first three events. The ripple effect of these four events is reflected in today's market performance.
To correct the markets, our government (Bush/Paulson/Bernanke) have suggested the use of taxpayer money to buy the securitized mortgage instruments. To me that is like healing a broken bone sticking through your leg by cutting off the protruding bone and then sowing the skin closed. That not only sounds extremely painful, but it's obviously not a very effective way to address the broken bone.
I have another idea. How about the laws are changed so that the ARMs are changed to 30-40 year fixed rate mortgages with two fixers; the two fixers would be that 1) the new fixed rate would be adjusted to the AFR + LIBOR at the time the loan was made and 2) the principal of the loan would be adjusted down depending on the geographical location of the home. My wife has suggested a third fixer which would essentially be a bridge loan to homeowners who have missed ARM mortgage payments but still have the wherewithal to make fixed rate mortgage payments. Good one sweetheart.
There's a lot of issues here, such as the treatment of loan forgiveness income and the treatment by the financial institution of the difference between the original principal and the adjusted principal (deduction, tax credit or some kind of hybrid?).
The original idea by our government was solely to pay off their pals, and we certainly don't need anymore of that. And, of course none of the above deals with the regulatory issues, or maybe more importantly, the criminal issues that may exist as the public (investors) were clearly lied to about the health of our financial markets and consequently could not make sound investment decisions.
By: Paul Glenn
