Mortgage Bailout Math
I’m not sure if mortgages is the right category for this, but I have to put it somewhere, so I’ll put it here.
A lot of friends have asked me what I think about the various bailouts, stimulus plans, etc.
I agree with many people, that they simply won’t do what they are being touted to do, and at the same time are way too expensive. Instead, I have an alternate plan for the $750 billion spent to bail out the mortgage crisis:
1. There are approximately 55 million households with a mortgage in the United States.
2. Let’s estimate that 10% of these are in some form of default, but that ultimately 20% of mortgages will fall into that category.
3. Let’s take the $750 billion as a given, in other words, if you wanted to spend that much to fix the problem, what would you spend it on.
Simple arithmetic tells us that we could pay approximately $13,600 on the mortgage of every household in the country. Not pay the homeowner, but pay it on their behalf to their mortgage lender. Wouldn’t this solve the problem far more effectively, and for the same price? Yes, I realize it is a bad idea, and I am half joking in proposing this, but isn’t a bad idea that accomplishes its goal better than a bad idea that doesn’t?
Alternatively, we could pay just over $68,000 on the mortgage of everyone in or near default (the 20% mentioned above). This has the benefit of helping where the situation is most dire, but is also completely unfair to those who are current on their mortgages. Not to mention those that don’t even have a mortgage, whether they rent or have paid theirs off.
Maybe there is a happy medium where we can focus some money on those who are in default, while still giving a handout to those who are current or don’t have a mortgage.
So let’s try again, but with different numbers. Take the $750 billion bailout, and add the $787 billion stimulus plan and get $1.537 trillion. Then pay $25,000 on the mortgage of anyone in or near default (11 million homes) which uses up $275 billion. Give the government a lien of $25K on each home, to be paid out of any profits when the house is sold, or forgiven if the home is sold for a loss.
This leaves $1.26 trillion to spread among the other 89 million households in the country, or just over $14,000 per family that is not in default.
So, if you are in or near default, you get $25K, but it gets paid to your lender, not you and gives the government a lien when the home is later sold. If you are current, or don’t have a mortgage, you only get $14K, but it is unrestricted cash that you can spend, invest or burn to heat your home.
This proposal is utterly ridiculous and would never happen, but it still makes a lot more sense than the plan that did pass.
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Comments
Thanks for the kind words. I am hoping to get into some more quantitative discussions; I hope you enjoy them.
I have heard the green shoots of recovery are showing through and with the second term of Ben Bernanke, im confident the economy will turn around, just when??
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