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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Obama: Start a New (Good) Bank

The government should start a new bank that would begin lending to businesses and consumers with good credit ASAP.  This action is the best way to unfreeze credit and halt the continuing economic downward spiral.

If the government steps in and buy one or more of the sound banks and use it to start lending again, other banks would come back and start lending also, and those banks that continue to refuse to lend to their customers would loose those customers to the new US Bank and thus loose their competitive advantage this bank should be publicly traded so that it competes with the rest of the banks.

Buying bad assets from the mismanaged banks would reward irresponsibility and there is no guarantee that the bailed banks would use that money to re-start the economy through lending.  If anything, they are more likely to keep coming back to the government for this unending financial bonanza.  We have seen their capacity to hold the government and by extension the American people to ransom by how they used of the first TARP allocation:  

*    On December 1, 2008, Citi after receiving TARP went ahead and bought from Spanish construction company Sacyr Vallehermoso,  its highway-operating unit, Itinere, in a deal valued at nearly euro7.9 billion ($10 billion).
*    We all knew about Merrill Lynch $4 billion bonus story; Bank of America's anti labor organizing skills and donation capacity to Republican Senators' re-election; Citi's $50 million jet story; and Wall-Street $18 billion bonus story.

If the government should acquire say two or three banks with national reach and put half of the $350 billion TARP fund in it to lend directly to businesses and consumers, this whole problem of frozen credit would be solved and the economic decline would stop as economic activities pick up steadily.

President Obama should do the following in addition to everything he has been doing to resuscitate this economy:

1.    Start a new bank with national immediately (it should remain publicly traded so the government could exit smoothly anytime it wants).
2.    Re-impose the uptick rule for short-sale on the Stock Market ASAP
3.    Organize and regulate the CDS(credit default swap)

The first action would unfreeze the credit market, the second action would stabilize the stock market, and the third action would liquefy the illiquid CDS market and allow the banks to sell the toxic assets in the market to the highest bidders.  

This writer lives in CA and works in the financial industry a Vice President and Chief Financial Officer of a Los Angeles based Community Development Financial Institution.

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15 yrs Amortization of Wall Street's Cumulative-Losses: Sensible Bailout Formula

This morning we woke up to the news of a government bailout for Citigroup.  A bailout that would have the taxpayer holding the bag for the excesses of some greedy managers who ignored risks and pursued profit at all cost.  The summary of the term of the bailout as outlined below:  

NEW YORK, (Reuters) - The U.S. government moved to bail out Citigroup Inc, agreeing to shoulder most potential losses from $306 billion of its toxic assets and inject $20 billion of new capital, its biggest effort yet to prevent a big bank from failing.......
The $20 billion of U.S. government capital is in addition to $25 billion it injected into the bank last month. The government is buying preferred stock that will pay an 8 percent dividend.
In exchange for the bailout, Citigroup slashed its quarterly dividend to a penny per share from 16 cents. It cannot raise the dividend for three years without U.S. consent.  Even so, taxpayers are now on the hook for nearly $250 billion of losses resulting from the bank's missteps.
"The authorities will do whatever they feel is necessary to ensure that the Great Depression will not return," said Gavin Graham, director of investments at BMO Asset Management in Toronto. "The effect on confidence is too great." Graham manages about $50 billion and owns some Citigroup debt.
Citigroup will absorb the first $29 billion in losses on a $306 billion portfolio of loans and trading assets, plus 10 percent of any additional losses, for a maximum total exposure of nearly $57 billion. Treasury, the Federal Deposit Insurance Corp and the Federal Reserve would absorb the rest.
In return, Treasury and the FDIC will get $27 billion in preferred shares as well as warrants to buy $2.7 billion in Citi common stock at $10.61 per share. http://news.yahoo.com/s/nm/20081124/bs_n m/us_citigroup

I'm not against all bailouts.  I'm against dumb bailouts that privatize profits and nationalize losses; I'm against dumb bailouts that ignore the basic tenets of our market economy.  To the contrary, I like bailouts.  I believe that the Automakers should be bailed out if they present a reasonable plan of actions.

Having done my mandatory ranting, let's move ahead and introduce what I believe would be a novel formula for current and future bailouts of all and any corporation in all or any industry:

It's a 15-20 years amortization of cumulative losses.  This is an accounting tool that would keep private losses private while helping the economic system to stabilize in the long run:  Let's take for example the current Citigroup bailout and re-write it with this model:

Current Bailout Plan and distribution of current and future losses (in Billions):

Total potential losses             $     306 or 100%
Citi's share of the losses     $      57  or    19%
Taxpayers' share of the losses     $     249  or    81%

Proposed Bailout Plan and Distribution of Current and Future Losses:       
Total potential losses             $     306 or    100%
Citi's share of the losses     $     306  or    100%

Let's assume that Citi eventually sold all those assets at $150 billion.  This scenario would result in a $156 billion in losses to Citigroup.  Because Citi might not be in a position to absorb this huge loss in a single year and still maintain a viable business, it is allowed to capitalize it as a long term liability on its book, and amortize the cumulative-losses over a period of 15 years.  In the meantime, the government would give Citi a loan equal to the cumulative-losses ($156 billion) at say 8% as a working capital replacement to help Citi to slowly and methodically absorb the cumulative-losses over 15 years.  This capital replacement would be amortized over the life of the amortizable cumulative-loss, matching loss recognition to Fed-loan repayment.

Potential Taxpayers' bailout contribution in this scenario would be equal to the amount of capital provided to Citigroup to cushion the capital loss from the sales/liquification of the $306 billion assets.

Balance Sheet treatment of this special sale should be as follows:

Credit to $306-billion-asset-account for $306 billion (Asset Sales)   
Debit Cash for $150 billion (Asset)
Debit Amortizable Cumulative losses for $156 Billion (Asset)
Credit Government bailout capital injection $156 billion (liability)    
Debit Cash for $156 (Asset)

Thus the corporation's cash flow would receive a big boost from the transaction; potential liquidity problems solved; and corporate profitability lightly impacted in current period.

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Please Leave Obama out of 8

Folks should leave Barack out of this "Proposition 8" fight.

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Where are the Surrogates?

I'm perplexed. I'm baffled. Where is the Obama Campaign attack team?  
The candidate cannot be his own attack dog - NO.  

Why is Barack Obama the only one campaigning for Barack Obama?  Where is his campaign staff?  Where are the surrogates?  Why are the surrogates not allowed to be taking up issues with the McCain/Palin train-wreck on a daily basis?
If this campaign should be about issues, is it not wise to have lots of surrogates laser-pointing at each issues on daily basis and exposing/contrasting McCain's positions on those issues everyday for the next 7 weeks?

Give me some answers please; I love your ground game but I also need you to control the daily narratives for the next 7 weeks.

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"Republican McCain, same as George Bush"

Obama's attack line should be something as simple as "My Republican Opponent, John McCain is same as George Bush" 

Have this in every Town Hall
Put it at the end of every Ad
Use it as daily talking point

Just pond on it the McCain is the Republican opponent and his regime would be same as George Bush's.

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It's time for us to take over this campaign!

I just had it with the McCain Campaign and a non-responsiveness or counter-attack from the Obama side.  But I believe that the silence of the Obama camp created a void that must be filled, an opportunity that must be capitalized on.  

I have this idea and want to see how many people would like to join me on it.  If I have enough people willing to give $10 a week and also contribute ideas, I'll start "American Progressive Alliance" 527 that would be dedicated to producing and running "mean" attack ads against John McCain and other mean-spirited Republican candidates nationwide or in certain states or areas:

* The content of the attack ads would be derived from McCain's daily-gaff lists.
*We'll not accept any ad that is based on lies; all ads must be factual since I believe that McCain gaffe machine is capable of producing at least two gaffes daily.
*We'll start with the one that nails McCain for not knowing much about the economy and drag Phil Gramm's "nation of whiners" comments in the same 30 minutes ad that would run from time to time in most swing state until November.
*We'll encourage participation of the netroot community in creating as many ads as McCain gaffes.  One or two ads for every gaffe.  No gaffe would go unnoticed.  And reruns would be the order of the day.
*We'll not be interested in promoting Obama.  His campaign does a good job at that.  We just want to tear McCain down using his gaffes.

Finally, I want to tell us what we already knew - negative attacks works.  They work whether you like them or not.

I'm ready to register a 527 on Monday if I have your support.    

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Obama Could Still Lose This Election

Obama Could Still Lose This Election

Several things happening now heightened my fear that Obama is not being diligent about wining this election.  He could still lose if he doesn't change some tactics.  I really have issues with the following developments:
1.    he's not keeping his promise to fight back promptly and to bring "a gun to a knife fight".  The McCain campaign has been running several false attack ads against him and since he came back on Saturday, I've been expecting him to respond forcefully with the truth.  
2.    His campaign should stop praising McCain e.g.: "I know that John McCain want to keep America safe, so do I" this kind of line affirming McCain who is not interested in running any respectful campaign is a negative for Obama
3.    VP:  I believe that removing Wesley Clack from his VP list is a mistake.  If Obama wants to go for a white male, it should be a know General.  Tim Kaine as VP would lose Obama the election.  McCain's only chance of winning this thing is to wait for Obama to pick a non-General white male VP, for McCain to pick Gov. Sarah Palin of Alaska and win the election with the support of older white women who happen to be the largest electoral demography in America.  Obama's VP, if not a General (like Wesley Clack) should be Gov. Kathleen Sebelius of Kansas.
On VP, Obama has no choice; it's either a General to neutralize McCain's military experience - like Clack did a few weeks ago, or a female governor, which will cover for the female vote as well as the economy (Americans trust governors to be good economic managers)

Finally, Obama should keep his promise to fight back promptly, ad for ad, press-release for press-release, conference-call for conference-call, radio-ad for radio-ad, web-ad for web-ad.   Obama should also hire Wolfson away from Fox News to take charge of his media counter-punches.  Currently, I see no real fighter in Obama media team that could match Tucker Bonds who is an amateur compared to Howard Wolfson.

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Is John McCain a Serial Liar?

It seems that the past weeks did portray John McCain as a serial liar.  The list is long but I'll try to list some of the areas that jumped at me.

Just shortly Iran test-fired some missiles this week, McCain came out to claim that the test was conducted by the Revolutionary Guards that he (McCain) voted to label a terrorist group.  

McCain said: "It's my understanding that this missile test was conducted by the Iranian Revolutionary Guard. This is the same organization that I voted to condemn as a terrorist organization when a amendment was on the floor of the United States Senate. Senator Obama refused to vote, called it provocative. Called it a provocative step. And the fact is, this is a terrorist organization and should have been branded as such."
http://mediamatters.org/items/2008071000 08

Well it turned out that he did not vote on the bill - a bold face LIE.  Media Matters has the video and the comments from CNN  

Then there was the lie about his time as POW in Vietnam, replacing the Greenbay Packers in his famous book with the Pittsburg Steelers at an interview event in Pennsylvania.  ABC has this on the story:

"In Pennsylvania, McCain Tells a New Version of Heroic P.O.W. Story -- Subbing the Pittsburgh Steelers for the Green Bay Packers" 
http://blogs.abcnews.com/politicalpunch/ 2008/07/in-pennsylvania.html
It's a lie of Tuzla proportion.  It's McCain's Sniper-Fire moment.

Again on his votes in the Senate, McCain could not admit that he voted against measures that would have forced the insurance companies to give women a pill choice as they gave men a Viagra choice:  
"I certainly do not want to discuss that issue," the Arizona senator said aboard his "Straight Talk Express" bus in Ohio when asked about his views on health insurance covering the medication.

However, the record was presented to him and he refused to acknowledge it:

McCain has voted against Senate measures that sought to require insurance companies to cover birth control medication.
http://politicalticker.blogs.cnn.com/200 8/07/10/mccain-avoids-viagra-question/

Then McCain claimed that he did not say that he don't understand economic as he should.  Think Progress has it here:
 This week, Sen. John McCain (R-AZ) is traveling through Colombia, making a push for a free-trade agreement. In an interview with ABC this morning from Cartagena, McCain was asked about his now infamous statement that he doesn't understand economics well. McCain quickly interrupted the interviewer, denying he ever said this:
Q: You have admitted that you're not exactly an expert when it comes to the economy and many have said -
McCAIN: I have not. I have not. Actually, I have not. I said that I am stronger on national security issues because of all the time I spent in the military. I'm very strong on the economy. I understand it. I have a lot more experience than my opponent.
But here is what McCain said in January 2008:
McCain: I Never Said That I Don't Know Much About Economics»
This week, Sen. John McCain (R-AZ) is traveling through Colombia, making a push for a free-trade agreement. In an interview with ABC this morning from Cartagena, McCain was asked about his now infamous statement that he doesn't understand economics well. McCain quickly interrupted the interviewer, denying he ever said this:
Q: You have admitted that you're not exactly an expert when it comes to the economy and many have said -
McCAIN: I have not. I have not. Actually, I have not. I said that I am stronger on national security issues because of all the time I spent in the military. I'm very strong on the economy. I understand it. I have a lot more experience than my opponent.  
In fact, McCain and his advisers have repeatedly admitted that he is weak on economic issues:
"The issue of economics is not something I've understood as well as I should," McCain said. "I've got Greenspan's book." [December 2007]
Seeking to explain his shift on economic issues, McCain claimed: "I didn't pay nearly the attention to those issues in the past. I was probably a 'supply-sider' based on the fact that I really didn't jump into the issue." [January 2000]
Carly Fiorina, a top McCain adviser, acknowledged that McCain has said he knows little about the economy, noting that "he did say it one time, no question, maybe twice." [6/10/08] http://thinkprogress.org/2008/07/02/mcca in-dodge-economics/

McCain also lied about his divorce in his famous-book.  Here is the LA Times take on McCain divorce saga:
1.    McCain said in his 2000 book, "I spent as much time with Cindy in Washington and Arizona as our jobs would allow," McCain wrote. "I was separated from Carol, but our divorce would not become final until February of 1980.".  This indicated that he had separated from Carol before he began dating Hensley.  But according to court documents,  McCain did not sue his wife for divorce until Feb. 19, 1980, and he wrote in his court petition that he and his wife had "cohabited" until Jan. 7 of that year -- or for the first nine months of his relationship with Hensley.
2.    LA Times also write that, "Although McCain suggested in his autobiography that months passed between his divorce and remarriage, the divorce was granted April 2, 1980, and he wed Hensley in a private ceremony five weeks later. McCain obtained an Arizona marriage license on March 6, 1980, while still legally married to his first wife." http://www.latimes.com/news/nationworld/ nation/la-na-divorce11-2008jul11,0,59249 26,full.story

McCain even lied on the Veterans.  A Kossack blogged about it here:  http://www.dailykos.com/story/2008/7/8/1 42125/0361/907/548283

And on and on the list goes to more and more and more lies.

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Obama should avoid this Iran trap

BO should avoid this trap of "more talks" by the MSM.  He should stop criticizing US government for Iranian intransigence.  

Was it the American (Bush's) fault that Iran test-fired some missiles today?  NO
Was it American (Bush's) fault that Iran refused to back down on its nuclear weapon program?  NO

Now that people in the know are sure about confrontation against Iran, it's time for BO to start highlighting Iranian intransigence like the nuclear program itself, harassment of US ships in the Gulf, today's missiles, and Iranian provocative rhetoric.

Instead of blaming Bush for everything wrong with Iran; the Mullahs bears the blame for Iranian situation.

I'm not a Bush apologist, but I don't want BO to become trapped into an Iranian apologist.  

The Mullahs of Iran hates America and everything we stands for; so enough with this "BLAME BUSH FOR IRANIAN MISTAKE" trap.

Make no mistake about it, US or Israel will take out Iranian Nuke facilities before this November.  Like I wrote in one of my prior diary:
Attack on Iranian nuclear facilities in right now inevitable and would happen between September 5 and October 15, 2008.  

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