A Simple Fix for Our Economic Mess … Really

September 13th, 2011

By Richard D. Bailey

Mark to MarketIt’s very simple. The economic crisis will not end until the marketplace redresses the problem that caused it in the first place — housing. Fix the housing crisis and you fix the economy. Fix the economy and you fix the deficit. Fix the deficit and you fix … the economy.  Fix the economy and you fix … you get the picture. The virtuous cycle becomes self-reinforcing.

But I don’t understand why no one has yet to grasp that there is a way to instantly revive economic growth, provide a monstrous stimulus at no taxpayer cost and inject trillions into the larger marketplace in the form of higher consumer discretionary spending. As a result we can create the GI Bill for American Homeowners. Perhaps the easiest answers are always the hardest to find.

So, what is this simple solution? Let homeowners refinance their mortgages at the current mark to market value recorded by their mortgage holder or bank.

Think about it for a moment.  If your mortgage is underwater, then under mark to market accounting rules the bank should have already written it down to a lower value.  What that means is that they have already told someone at the Federal Reserve, FDIC, FHA or other government agency that the ramshackle Victorian at 1313 Mockingbird Lane is not worth the $250,000 mortgage that they carry on it but is actually worth $150,000. As a result of mark to market accounting the bank is then forced to reduce the value of that asset on their books to $150,000. In recording the lower value on their books they then take a $100,000 reduction in their asset base and make a corresponding charge to net capital. In other words, they take the loss then and there.

In an instant, poof!  It’s gone! That $100,000 is a faint and distant memory never to be seen again until the housing market recovers.  And that may never happen.  

Now back to the owners of that ramshackle Victorian. Herman and Lily Munster, assuming they have a 7%, 30 year fixed mortgage, are still on the hook for the full $250,000 mortgage the bank admits is really only worth $150,000. This obligates them for a monthly payment before taxes and insurance of around $1,663.25 a month. But allow the Munsters to refinance the mortgage at its current mark and voila! Herman and Lily now have a monthly mortgage payment at those same terms of approximately $997.95 per month. That’s a savings of $665.30 per month or $7,983.60 a year.

Multiply the Munsters’ good fortune by millions of homeowners and you have the single greatest economic stimulus in history, and it didn’t cost the taxpayer a dime!

Think about this. Banks would raise billions in cash from the sale of the assets without incurring additional losses because they have hopefully already recorded the loss. Homeowners would be on the receiving end of the greatest economic stimulus ever created as they reduced their monthly housing costs dramatically. Millions who are underwater and underemployed may suddenly be able to afford their homes again. The moribund mortgage industry would instantly come back to life as mortgage lenders and hopefully community banks would be swamped with refinancings … just think of the multiplier effect on the billions in fees to be earned!

It’s so simple. The bank already admits that that the Munsters’ family home isn’t worth $250,000. So the bank and its shareholders have already taken that hit. The only thing they give up is the future cash flow of that loan or the future gain if Herm and the Lilster manage to sell the house for $250,000 or greater. Again, that may never happen.

So the inescapable fact is that Herman and Lily are on the hook for $100,000 in value that the bank and the government regulators admits just ain’t there.  Solve that problem and you fix the fundamental cause of the great recession. Fix the fundamental cause of the great recession and you put people back to work. Put people back to work and … you get the picture.

So let homeowners refinance at the current mark and billions if not trillions of dollars of savings will reflate banks in the form of deposits and also find its way back into the economy at large, the stock market, federal, state and municipal coffers … maybe even to the makers of blackout curtains for Grandpa’s room, orthodontists for Eddie and plastic surgery for Marilyn.

But for the politician who picks up this idea and runs with it? Now, there’s a shot at immortality.

Richard D. Bailey is a writer based outside of Boston, MA. His new website, The Accidental Humanist.com, will debut soon. He holds an M.A. in Communications from Fairfield University and a B.A. in Political Science from Providence College. He can be reached at rdb@rdbailey.com

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One Response to “A Simple Fix for Our Economic Mess … Really”

  1. laura |

    I totally agree. This is my situation. What is taking this administration with all the lawyer nobel peace prize winners, and geniuses at large so long.

    Why should the banks do this. They individually have no incentive to be honest about it. They are institutions of profit and act accordingly. Why make loans when you can sit not the funds, extract fees, and avoid any risk.

    In fact the banking regulators appear to have put pressure on the bank appraisers to be overly conservative I have paid twice for bank appraisals only to be so disappointed and find my LTV is below what I think it should be, and I am realistic about the backslide my property value has taken. But no dice. When will I attempt this again? Right now I am taking care of the property it is not a ramshackle home, but it will be when I run through my nest egg to meet the over market interest rate I am being charged.

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