Greetings Kossacks, first diary here, just had some musings that I would like your feedback on. A little background on me- I grew up on a family dairy farm and survived the farm crisis of the 70's and 80's. The farm crisis as I best understood it was this. Farmer buys farm for $200,000. After several years banker says "Mr. Farmer . your farm is worth $350,000. May I float you $150,000 to make improvements?" Farmer says yes, couple of refi's later farmer is in for $400,000 on a farm worth $450,000. couple of years later farm values crash. farmer misses one bank payment. banker says"turns out your farm is only worth $250,000, you owe $400,000. we're gonna take it back if you miss another payment". farmer realizes that he is paying almost $80,000 a year in interest (lots of adjustable rate lines of credit back then that hit %18 interest. our farm actually payed $100,000 interest one year alone). farmer says forget it! walks away head hung in shame. after several foreclosures bank realizes that it really doesn't want all of these farms back, so they start "writing down" interest for the year- basically forgiving a year of interest if the farmer will buckle down and do his best to protect both of their investments. THE BANK REALIZES THAT IT IS BETTER TO FORGIVE THEIR PROFIT (INTEREST) AND PROTECT THEIR ASSETS (PRINCIPLE).
The farmer is motivated to work a little harder, make a few sacrifices, and rides out the storm. Milk and corn prices rebound and farming returns to a profitable status. Banker loses a year of interest, but saves his principle. There was a several year stretch in which almost all of the farms in our area had to go through this process. By doing this it did give some stability to farm values, and gave the farmers the ability to see the light at the end of the tunnel, stay motivated and ride the economic storm out.
And it is this concept that I think should be incorporated into our economic stimulus package.
I am concerned that our governments approach to solving our economic woes is still too much of a top down approach. If we protect the "average Joe" then our financial institutions will survive just fine. So here is what I think would work:Have the US govt. demand that all banks holding any and all home mortgage loans forgive interest for one year. US govt would reimburse banks at a rate of %2 interest. US has a total of around of $ten trillion total in home mortgages as of Q2 of 2008. %2 of this would come to around $200 billion expenditure by US govt. From the perspective of the troubled mortgage holders, they would be very motivated to make as large of payments as possible due to the fact that it would all go to paying down principle. If your loan to value ratio was at %100, after one year not having to make interest payments, if you could afford to make usual payments you could potentially pay your loan down to where your loan to value would be closer to %90. This would help keep you motivated to not lose your home if you hit troubled economic times in the future. And if you are one of the millions who is unemployed/underemployed this would at least give you a chance to stay afloat/housed for another year in hopes for an economic recovery that would allow you to make normal payments again. The banks would benefit, because they could write off as losses the difference between the %2 that they would get reimbursed and the usual rate that they would collect %6-7?, plus their principle would be getting paid down by many, bringing a better balance to their books. As their books start to look better, the commercial paper market that backs them would gain confidence as well.
If we taxpayers are going to toss around hundreds of billions to protect our banking and mortgage institutions, wouldnt this plan at least benefit both homeowners and banks in a more equitable fashion? Tell me what you think.