The $700 Billion Bailout

The $700 Billion Mortgage Bailout

"Wall Street Slick Willies" get to walk away from their companies

 September 26, 2008

By: Drew Sygit CMPS, CMLO, CALO, MBA

 BLOOMFIELD, MI - There's an email flashing across the internet, forwarded by the multitudes unhappy about the proposed $700 billion bailout of the banking industry.  This email proposes that instead of effectively giving the money to Wall Street, that it be given instead to the American people. 

 The email estimates that there are 200 million adults in the U.S. and if the $700 billion was divided among them, it would mean $350, 000 for each of them.  In its various formats the email goes on to state that with $350,000 (or $700,000 for a married couple) mortgages could be paid off and debts settled, effectively ending the credit crunch & banking crises.

 If only it was that easy!  Someone didn't check the math on this before sending it out around the nation.  The $350,000 is off by a factor of 100, so it would only give each person $3500.  That amount isn't going to solve many problems.

 What is interesting though, is how fast this email has circulated.  It points to the general outrage Americans feel about the latest bailout program Congress is wrangling over.  First Bear Sterns, then FNMA & FHLMC, then AIG and now Wall Street gets a bailout.  What about the American people suffering under all the mortgages and debt plied upon them by all of the above?

 That's the question people from Joe Six-Pack to former Wall Street'ers to an increasing number of those in Congress are asking.  How is it fair that those that drove all these firms (add WAMU to the list as of this morning) into insolvency get to keep their millions in salaries and bonuses?  Salaries & bonuses effectively funded by mortgages on the homes of Americans - many of them now losing their piece of the American Dream to foreclosure?  The "Wall Street Slick Willies" get to keep all their ill-gotten gains and relax in their luxurious homes, safe from the foreclosure mess they've created.  Those getting foreclosed on though, who made no more worse decisions than the "Wall Street Slick Willies", suffer eviction, credit damage for up to 7 years and untold amounts of stress.

 There's really no "neat & tidy" solution to this part of the problem.  But, Congress can do more for those dealing with foreclosure.  In addition to ramping up Loan Modification efforts, members of Congress should consider addressing the following:

• Penalize the "Wall Street Slick Willies" by taking away any bonuses paid related to their company's dealings with the mortgages bought by the Federal government in any bailout plan.  Retirement funds could be returned also.  There could also be a ban on working in the financial industry for 5 years as they obviously have some competency issues with money.

• The Mortgage Forgiveness Debt Relief Act excluded income realized from mortgage modification or foreclosure, but didn't do anything about the deficiency judgments that can still be pursued against many after foreclosure.  These judgments will force many foreclosed upon to also file for bankruptcy, causing further financial pain for the economy.

• Allowing FNMA/FHLMC/FHA to refinance mortgage balances up to 125% of property values for those that want to stay in their homes long-term, but have high interest rates or adjustable loans.  Borrowers would have to re-qualify for this type of loan with solid credit and income.  To curtail borrows from walking away from their houses at a later date, a provision could also be added to treat the mortgage debt like student loan debt - it couldn't be included in a bankruptcy.  Any amount not recovered through a foreclosure sale would follow the borrower around for life.

• Altering FNMA/FHLMC's current guideline requiring 5 years to elapse after a foreclosure before being eligible for another mortgage from them.  This guideline was just increased from four years, in response to the recent increase in foreclosures.  This guideline will suppress any rebound in housing demand and thus prices for quite awhile.  An exception for foreclosures occurring between specific dates related to this crisis should be considered, as long as a borrower can demonstrate they had acceptable credit before this crisis and re-established acceptable credit afterwards.

 These provisions should be considered in some form, for inclusion in any future bailout packages Congress agrees to pass.  If "Wall Street Slick Willies" are going to get bailed out, Congress should do something to help the Joe Six-Packs.

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Drew Sygit is President of The Lending Edge and holds mortgage industry designations CMPS, CMLO, CALO and has an MBA.  He's spoken for HUD, has written numerous articles and is a mortgage industry advocate for loan originator licensing and consumer education.  He can be reached at 248-310-3739 or dsygit@TheLendingEdge.com.