Thursday, January 29, 2009

I'm on a roll - more on that $4,000,000,000,000

Premise: estimated cost to buy up mortgage-related "toxic assets" is $4,000,000,000,000.
$4,000,000,000,000 = 80,000 median-income households ($50K = median household income).

I'm going to stick with Plan 1 (see below): give 80,000 households $50K to make whole their mortgage and credit card debt. (... and if your household has no delinquent mortgage or credit card debt, the money is yours to do with as you please.)

What to do with your $50K?
Well - this entire analysis is based on the median-income household, so I'll work things out for the median-priced home.
(My stat buds may quibble - but I'm just going for a ballpark estimate here.)

In 2007 - pretty much the peak of the market - the median-price home ran around $250,000.
In Dec, 2008, the median price was close to $210K - a 16% decline.

Take your $50K and refinance for the current market-price.
You walk into the mortgage company with a 24% down-payment, in cash.
You need to finance the rest (= $160K). Get a 30-year, fixed rate mortgage.

The original mortgage-holder eats the remaining 16%, and writes it off immediately.

In one fell swoop we've:
1. Secured an affordable mortgage for you.
2. Injected $50K into the financial system.
3. Helped stabilize housing prices.
4. Limited loss to original mortgage holder & subsequent "derivatives" to 16%.
And you get to keep your house!

Of course, this depends on original mortgage-holder being willing to take a 16% loss immediately. What if you have to eat it?
You're now walking into refinance with 20% cash down-payment ($50K of $250K), and financing the remaining $200K - which is what the house is worth. We get 3 out of 4:
1. Secured an affordable mortgage for you.
2. Injected $50K into the financial system.
3. Helped stabilize housing prices
... + 4b: made whole the mortgage. No one has to write off anything!
And - still - you get to keep your house.

Caveat: I stress - what I know about economics & finance can be written in big block letters on a postage stamp.

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