OTS' New Plan For Fraud...

Another “plan” to keep people in their homes, but one that will lead to tremendous losses and unaccounted fraud.

Check out CNN's article Mortgage crisis: Don't forgive debt, just postpone repayment

“Aren’t we trying to keep people in their homes? Isn’t that the best thing for the economy?” you may be asking. I think we need to get beyond what I have dubbed the Iraq Response for addressing issues and crises.

Regardless of how you feel about Iraq, there is an underlying argument that is used for proponents of staying until “the job is done”. I am not going to debate the war (please don’t e-mail about that) and there may on may not be some validity in that position of “well, we may have underestimated the outcome (etc.)…but, now that we are there, we need to finish the job.” Again, there may be some weight behind that thought, but likely from a moral point of view, not a logical one.

However, can we use that same logic for all of the decisions that we make as an individual, an organization, or a country? My initial response is “no way!”

It is absurd to think that the recommendation that would be given to any individual regarding a tremendous financial blunder is to continue in that direction. For example, if someone acquired an automobile that they could not afford and they were getting crushed with monthly payments, then the logical response would be to get out of that situation. Sell the car or if you cannot, then the company will repo it. The creditor has recourse that they can exercise which is “repossession”.

But, for a friend, would you tell them to continue to make the payments that have been reduced with a large lump sum waiting in the end, or extend their payments from 48 months to 96 months on a depreciating asset? No, that would not be a good plan.

This new plan to “postpone repayment” is continuing to feed the fraud frenzy mindset that is out in the market today and is completely short sited.

There are so many thoughts and questions on yet another attempt and bailing out homeowners that likely should not even own a home. That may be harsh, but what do you tell your friend with a wife and 2 kids that makes $40k a year and goes out and buys a Ferrari? Is this a good idea? Of course not.

This proposed plan by the OTS is once again short sited and is doomed for failure.

You don’t have to be a genius to figure out why this won’t work.

How about this as an example…

A homeowner is underwater $150k (Sacramento) and the lender decides to issue a neg-am certificate for the $150k. The homeowner does not object and they are now making payments that have been re-amortized for $300k – a significant reduction in payments.

The homeowner wants to stay in the house through retirement, but doesn’t feel good about that extra $150k that is looming. They go out and find Mr. Strawman and get him to buy the house for the current market price of $300k. He does.

This now wipes out the $150k that was looming against the future appreciation of the home. Mr. and Mrs. Homeowner go out and get a new loan for $300k and repurchase the home. Voila! They are now making payments at the current market rate (hopefully) and without the looming neg-am certificate.

The risk was transferred to the one that purchased that “certificate” (security) as an investment and hopefully the contract was written in such a way as to avoid all potential for litigation (not likely). Now, he is out his investment and Wall Street (brokerage houses, financial institutions, and pensions) will pick up the tab. Again!

Who in the world would consider buying a Neg-Am Certificate? Let’s hope that there is no new legislation being developed that will give Fannie Mae and Freddie Mac full discretion to pick these things up. They didn’t do due diligence on the Subprime junk that they bought – just ask Cuomo in New York.