sean's place

Financial Woes

My bank, Washington Mutual, failed today. With the failures of Lehman Bros, IndyMac, and the bailouts of AIG, Fannie Mae, and Freddie Mac, it’s obvious our banking industry is in the tank. Perhaps soon, our government will become at least part owners in some of our major financial institutions in an effort to maintain the status quo.

I think we’re in trouble if we continue to prop up this failing industry. Housing prices in places like California (my home state) are vastly disproportionate to income. This hurts the economy too by driving up commodity and service prices. Any effort to artificially prop up home values as part of any compromise, is in my patently un-expert opinion, foolish.

If the news reports are right, we’re seeing people being foreclosed on or walking away from their unaffordable loans. If this is happening in the volume that the news would have us believe it is, then perhaps part of the solution is to stem the tide. Some repayment is probably better than none; and we might be able to reasonably assume that people were approved for these painful loans on some basis of repayment.

What if the government were to summarily dissolve any contracts preventing the wholesale rewriting of bad loans and allow the lending institutions to work directly with their customers to figure out a repayment plan? In this arrangement, the whole market would have to sacrifice:

• The homeowner would almost certainly lose any equity in their home at the cost of achieving an affordable payment. They may also have to live with a lien on any resale profits.
• The lending institution would have to accept a write down of the mortgage.
• Investors would have to actually accept losses on what actually were risky investments.

I’m not sure how feasible this is, but could the bailout be shrunk if banks could rewrite ALL troubled mortgages to a sum equivalent to a 30-year fixed payment (at this point, does the interest rate matter?) of 40% of the homeowners total income (assuming that number is within 70% of the current appraised value)? Could the government come in and insure these under FHA (under existing guidelines, perhaps) to provide the extra level of confidence to the lender?

I’m no financial expert (and I don’t even play one on TV). I have no idea if something like this might work or if we’re even too late for that. Certainly, some banks would continue to fail as a result of this. I think we have to accept that as collateral damage. Ultimately, we must stabilize our market but not at the expense of a necessary correction.