GOPideas... ideas done right

The idea that the federal government would practically hand a fianncial deliquent a house should outrage all Americans, but as discussed previously, the current "rescue" plan for people who cannot make their mortgages is rigged to ensure that banks eat a huge loss and the beneficiary of that loss is a delinquent "homeowner." In the current plan, there is no limit to the size of the writedown the bank must take, meaning those who took out mortgages could receive loan forgiveness in the hundreds of thousands of dollars. Republicans should easily be able to make the case that, even if you accept public money being funneled to those who refuse to abide by the terms of their mortgage, the forced generosity of other taxpayers should be limited to, at most, 20%.

For a detailed explanation of how the current bailout allows for nearly unlimited writedowns, click here. The Cliffs Notes version is that the plan forces mortgage holders to calculate whether they would be better off if they foreclosed on the property or rewrote the loan. The catch is that when making these calculations, the bank must use government assumptions. For example, let's say the delinquent borrower lives in Las Vegas, bought a $600K house with no money down. The market has since tanked approximately 50%. The occupants have fallen behind in their payments the bank is looking to foreclose. The bank is now forced to use the Obama administration formula to determine whether they can (because if the bank is "shown" to get higher cash flows through a rewrite, they are required to rewrite the mortgage).

Without going through the complex process (done here), one of the steps is determining how much the bank would get at foreclosure and this is done by taking market assessments of properties in the area and then applying an REO discount (because foreclosed homes sell for discounts to traditionally brokered homes). Let's say all the homes recently sold in the same subdivision have been foreclosures, so the bank does not apply a REO discount (because if all the homes sold the same way, the prices are comparable). The Obama administration can force the bank to apply an REO discount of its choosing (see p.5). This knocks down the value the bank can assume that it will get in foreclosure, thus pushing them toward writing down the mortgage.

This would then force (this is non-negotiable) the lender to take a mortgage that shows a debt of $600,000 and write it down to $210,000. (Calculated using a 50% equity loss, 30% REO discount.) This means that as punishment for falling behind on the mortgage, the occupants of this home received a $390,000 handout (difference between the $600,000 they originally owed and the $210,000 it is currently "worth".)

Regardless of one's position on the idea of governments forcing banks to rewrite mortgages or providing assistance to delinquent homeowners, can we not agree that handing people $390,000 in home equity is an excessive reward for individuals who do not pay their bills?

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