The Fixx (not the band)

An idea came to me yesterday while reading and listening to various opinions and objections regarding the stimulus package. It seems there is a consensus of concern about how to use the money to make the most immediate positive impact on the economy. How do we get it into the system WITHOUT the banks snagging it and sitting on it? What, if anything, will motivate banks to make loans, and get over the “failure” paranoia?

Answer: government backed loans i.e., FHA backed mortagages for refinance or purchase, with a loan limit raised to $2,000,000.

The benefits of such a program, my best guess, are as follows:

1. There is no immediate government outlay of cash, except in the cases where banks need it for solvency;
2. Home buying and refinancing would ensue immediately. Strict lending “standards” regarding borrowers’ ability to repay such loans are already in place. In fact, they are too strict. I imagine we would be shocked at the number of current non-defaulting homeowners that would be unable to qualify for loans equal to the mortgages they currently have. That is not acceptable. The fact that many are able to meet their home loan obligations doesn’t mean they aren’t hurting. Between job instability and a huge wave of the so-called “Alt-A” loans ready to reset to higher rates, there exists a potential tsunami of defaults. Why wait for the wave? Get these people some relief now.
3. The majority of home loans that banks are making now now are FHA loans. Banks like these loans. The profit is good, and they are government backed. The problem is that the limit is far too low to help stave off the aforementioned tsunami of defaults which will arrive courtesy of loans that substantially exceed current FHA limits.
4. Yes, there will be defaults for which the government will be stuck picking up the tab. However, the cost thereto will be far lower than the cost of the proposed stimulus package.
5. As I understand it, housing has led the way out of most recessions. Why should the current conditions dictate a different approach? There is too much on the line to be shooting in the dark, which is exactly what I believe this package represents. Home loans are a known. They are desperately needed, and I don’t see anything in the proposed package that offers direct help in this regard. Nothing will provide growth in employment faster, and at less cost in government funds, than providing a  substantial, if not unprecedented, boost to home lending.
6. I’ve never seen anything as weird as 5% mortgage money that no one can get. I’ve never seen the Fed discount rate at 0%. Doesn’t that mean anything? It means that we, the government, and the banks have to get over the paranoia that the NINJA loans (No income, no job or assets) will recur. Of course they won’t recur as long as no one can get a loan. The pendulum has swung too far, and it is strangling this country for no better reason than, “we won’t let that happen again”. COME ON FOLKS! How long are we going to wring our hands about what has already occurred? No one can do anything about that. It is as if it has been mandated that by making loans impossible to obtain today, we are reaching back in time to punish those that already screwed up. The only ones being punished are those that are here now, working their respective tails off to make ends meet.

If you know why this would not work, I seriously encourage you to express your opinion with a comment on this post. We are smarter than the government, the banks, and certainly Wall Street, will give us credit for.