A Better Plan

By: Michael Phillips

This is an appropriate time to restate a better plan since there are rumblings coming from the halls, or perhaps the bowels, of congress with respect to the need for a second bank bailout.

Congress gave the banking industry $700 billion, now it is offering them another $30 billion. Millions of the taxpayers supplying the money for these bailouts were, and still are, facing foreclosure. There was nothing in the $700 billion bailout to help them and there is nothing in the new $30 billion bailout to help them. Read the following scenario. Perhaps it fits you, or someone you know.

Paul and Linda bought a home for $150,000. ABC bank financed one hundred percent of the purchase price at 4.5% interest. Paul was laid off, leaving the family with one income for a period of time. He replaced the job he lost, at a 30% loss of income. While Paul was off work the value of his home decreased in value by 35%. Paul and Linda still owe nearly all of the $150,000 loan principle on a home that is now worth only $97,500.

Paul and Linda are now months behind on their mortgage payment. They cannot afford the high mortgage payments and the bank’s collateral now appraises 35% lower than the principle amount of the loan. Nevertheless, Paul and Linda, we need you to bail out the banks a second time. By the way, like the first time you get nothing in return and we also need for you to bring your home mortgage current. Pay up!

I believe it made more sense to bail out Paul and Linda when the first bailout was funded. However, I did propose an alternative plan to the bill passed by congress to use the same $700 billion to bail out the banks, Paul and Linda. Yes, the same $700 billion could have been used to bail out everyone.

The bank should have been required to write down Paul and Linda’s mortgage, to the current appraised value of their home, $97,500, cutting the interest rate in half. After the mortgage was re-written the bank could have applied for $52,500 from the federal bailout fund; the difference between loan principle and current appraised value of Paul and Linda’s home. What is wrong with that plan? The bank would have gotten bailout money. Paul and Linda would have gotten a lower interest rate and a lower principle value of their loan.

What about the interest due the bank on the arrears? It should have been written off but I am open to paying that arrears out of the bailout funds. Make everyone whole. No problem. My issue with the legislation enacted by congress was the fact that homeowners like Paul and Linda were not made whole.

What about the fact that banks would still have been making 100% loans on appraised home values? This is something many believe contributed to the downfall in the first place? Since the taxpayers put up $700 billion to bail out the lenders, why not continue to help out both the taxpayer and the lender? The new loan could have been written for 95% of appraised value, paying the equity out of the bailout funds.

Is it water under the bridge now? No, we can still revisit how those funds were used and correct injustices to taxpayers supplying those funds. Let’s also learn from the first bailout mistakes. Before any bank receives money from the new $30 billion bailout, let’s require the bank to receive this bailout money only as it pays out those funds in the form of a small business loan. No bulk handout of funds. No exceptions.