In defense of securitization and derivatives

I originally was writing this up as a response to Billmon's excellent article today, Chocolate Covered Cotton. For the record, he makes some very valid points.  The whole system is now burnt, and we the average citizen has to pay for what really is fraud on a massive scale.  Saying all this, I have to take issue on the idea on the concept of CDOs, Swaps and the entire idea of securitization of loans being total junk.  That isn't to say that whats out there isn't toxic, but I'm looking forward.  

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Foreclosure Crisis: A Demand-Driven Solution

A Letter to President Barack Obama

Demand Driven Solution for the current housing foreclosure crisis: Using Rent-to-Own Mortgages to combat the foreclosure problem and stabilize the housing market.

Dear Mr. President,

In finding a solution to the current foreclosure problem, the government should be concerned with some of these questions:

1.    What measures would help the people already in foreclosure without encouraging those Americans who are still paying their mortgages promptly to default on purpose to qualify for principal-reduction or rate/term modification?
2.    Which measures are more likely to halt the steady price decline in the housing market and stabilize the market?
3.    Which measures would be most effective and transferable to the private sector?

I tried to answer those three question with the idea of government backed Rent-to-Own Mortgages.  In which people that are currently facing foreclosure could qualify to access the money to buy back their property from the Bank through the rent-to-own mortgage.  

I believe that this little idea could be helpful in assisting your team to find effective solutions to our current housing foreclosure crisis.  If applied, a Rent-to-Own Mortgage program would discourage people from manipulating the system by defaulting on purpose, while it gives immediate help to those families loosing their homes.

Before going further, I want to introduce myself to you.  I am 37 years old economic and financial professional currently serving as the Chief Financial Officer of a Los Angeles based community development and housing service organization.  A non-profit dedicated to building affordable housing, providing community sensitive lending, and helping stabilize communities through pre-purchase and post-purchase homeowners' financial education.  I have actively worked in the financial industry for the past 17 years.

While my lengthy financial industry years don't make me a unique expert on finances, my hands-on experience helping this community development and housing service organization does.  In the past 21 months, I have witnessed the organization help more than twenty thousand homeowners navigate through foreclosure either getting their loans modified, doing short-sales, or accepting foreclosure and relocating into rental properties.  

Housing is a basic necessity to every American family.  Whether they are buying or renting the properties, every American family needs housing.
 From experience trying to relocate families displaced from their homes, I realized that demand for rental housing in this market has skyrocketed in many areas of the country.

Looking at the market within the areas our clients wanted to relocate, we found a serious shortage of rentals but an abundance of REOs (foreclosed properties).  This fact is the main basis for the idea I am going to present in this letter - rent-to-own mortgages provided to all Americans utilizing the TARP II funding.  

While the demand side of housing-purchases has been declining speedily, supply for housing keeps increasing (with many banks' balance sheet seriously burdened with REOs).  The same cannot be said about the demand for rental-housing because it has increased significantly while supply of same has remained constant.  This risen demand for rental properties across the nation now presents the government with one singular opportunity to step in and satisfy this demand while at the same time stimulating demand in the housing market through a federally backed "Rent-to-Own" mortgage program.  

Rent-to-own Mortgages:
This mortgage should be offered through HUD, Fannie, Freddie, or other agencies; and should offer the mortgages through non-profit housing service organizations throughout the country that would also be responsible for the "case management" part of the "rent-to-own" mortgage program.  These mortgages should be structured in a way to attract private capital into the program too by specifying reasonable parameters and guidelines that make it a profitable venture (even for the government) and do not reward irresponsibility by borrowers or homeowners.

Potential Impacts of this program:  
Some of the potential impact of this program apart from the fact that it would create millions of new jobs for property management, property rehabilitation, and financial and lending services jobs include the following:

1.    Neighborhood Stabilization (because it would prevent cases of abandonments, and neighborhood blights).
2.    Stabilizing the housing market (by creating market demand to absorb the increases in supply due to foreclosures).
3.    Preventing further foreclosures as banks and financial institutions copy from the government program and start their own programs that would transform non-performing loans on the balance sheet into performing current investments.
4.    Helping American families in trouble at their time of need by giving them shelter even when the whole system was against them.  

I do not believe that this alone is enough to solve the housing crisis or financial crisis; however, I think that it would be a reasonable approach that would require minimal sacrifice from the American Taxpayers and potent minimal social moral hazards.

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Manufacturing Tuesday: Week of 12.01.08

(My apologies folks, for the delay.  This was supposed to be published this morning, but I had rush a sick wiener dog to one of those emergency vet places.  Rest assured, he's Ok, and probably won't eat another sock again!)

Ladies and Gentlemen, welcome to another edition of Manufacturing Tuesday!  Originally I wanted to post this on Monday morning, but I wanted to include the latest development from the Boeing SPEEA talks. Outside of this we got news from the steel industry, unfortunately not the good kind.  Sticking with steel for a moment, there's an op-ed piece I wish to highlight that I thought you should look at.  We have news or alarm bells I should say about pensions.  Of course we also have some Green news, some ominous, but some good.  

But before we get to those, let's take a look at the Numbers!

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Response to Weekly Radio Address

We need to phase out the mortgage interest deduction.  It doesn't increase homeownership (Canada's rate is about the same as ours without one), it's regressive, it's the biggest deduction in the tax code, costing more than twice the annual HUD budget, it encourages borrowing (like ill-advised interest-only loans) when we should be encouraging saving, and it skews housing production toward high-end homes (often second homes, vacation homes, investment properties, etc.) when we have a national affordable housing crisis.  Grandfather people who've already used or started using the mortgage interest deduction, then give others the option of choosing either the mortgage interest deduction, OR a one time, universal, fully refundable $5000 tax credit to buy their first home.  They'd still have to have adequate incomes and credit histories, reducing the risk of the kind of mortgage crisis we've just seen.  And such down payment and closing cost grants have been shown to help 1 in 9 renters become homeowners, which would also help prop up the real estate market.

Green jobs--yes.  Any auto bailout must include stricter requirements on auto manufacturers to make more fuel efficient cars.  Why don't they make buses, trains, and bicycles?  Those are the future and should be a condition of getting $25-50B.  They should also have to stop exporting jobs, and if we taxpayers are going to give them tens of billions of dollars, we deserve a fair amount of preferred stock and/or other say in the management of these companies.  Failed management shouldn't be rewarded with massive strings-free bailouts.

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A Guaranteed Right to Health: The Key to Presidential Greatness

President-elect Barack Obama has renewed our hope as Americans that the promise of opportunity is revitalized, alive and well. But in order to secure his own legacy as the first great president of the 21st Century, and one of the greats in American history, he will need a grand undertaking equivalent to Abraham Lincoln's saving of the Union or Franklin D. Roosevelt's New Deal. Amidst the current economic downturn, it would appear clear what the momentous challenge and chance for long-lived admiration will be for an Obama Administration, and it is health care.  Not small bore reforms of existing programs or expansions around the margins of the popular State Children's Health Insurance Program (SCHIP) or Medicare, but a truly revolutionary sea change in the compact that the American government and their people share in relation to the health of the populace.

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