An Open Discussion to All Americans                     August 18, 2011

Dear America:

There are potentially serious solutions to our serious problems. I am not certain that many political office holders have the background or experience in fields that require major changeovers. I am focusing on just one area, mortgage banking, and it affects a large majority of middle America. A large majority of middle Americans have mortgages on their homes.

We have nationalized the mortgage industry. It happened with the economic crisis.

However, I'm not writing this to debate its cause. Rather, how a solution would greatly raise ALL ships.

Most of you know that Fannie Mae and Freddie Mac are now owned by the people of the United States. All their mortgages are sold into securitized pools, with our guarantee to investors in these pools for the return to the investors of all principal, and accrued interest. We now have this national obligation to pay on almost all individual, defaulted mortgages in order to make the security holder (investor) whole. If a foreclosed home had a mortgage of $120,000, and is sold at foreclosure for $75,000, then there is a $45,000 principal loss. The $45,000 loss is then increased by a 6% sales commission to sell that home, at least one year of past property taxes, some clean-up and property costs, one year of insurance, and at least a full year of past interest. That loss is probably then a total of closer to $60,000. That loss was paid by you.  

(Footnote below on foreclosure figures  and costs ***)

We are in this position by default, by the failure of Fannie Mae and Freddie Mac. We are just stuck in first gear, not making any headway to deal with a position that we inherited by default.

We have already nationalized the mortgage system. Every new mortgage loan created today, in the billions monthly even this month, have you and me as guarantors. (That goes for new Fannie Mae and Freddie Mac mortgages, Rural development loans, farm loans and each FHA and VA mortgage. We guarantee them. )

Lets 'fess up and acknowledge our position in nationalized mortgages, and turn it to our advantage. Keep in mind, we are already 100% obligated to make investors whole on any single mortgage default. We have taken on all the risk, and there is no more risk on those mortgages to take on that we don't already have.

So, what I am proposing cannot put us in any worse position.

You, I and all taxpayers are feeling the brunt of the situation. I have a common sense $6 trillion income solution. Currently, we (you and I) pay about $120 Billion per year in losses on mortgage guarantees to securities holders in Fannie Mae, Freddie Mac, FHA, VA, Farm and Rural mortgages from each foreclosure shortfall when a foreclosed property sells. We have guaranteed to pay the full balance on these mortgages. That’s why these securities are currently rated AAA. Yep, that’s our wallet that gets opened on each foreclosed home. We (you and I) make up for the difference of the mortgage balance and taxes and interest when a foreclosed home sells for lower than that total. Fannie Mae, Freddie Mac, FHA, VA, Farm and Rural (and therefore us and nobody else) are obligated by guarantees to mortgage-backed Investors for 100% of almost all residential fixed rate mortgages.

We need to stop these losses to us.  (Banks do not own these mortgages.)

Lets offer to REFINANCE them at their current balance at 3.00% interest. Its legal, and ethical. Refinancing is a norm. It causes pre-payment speeds to change which is a major reason why these (still) rated AAA investments yield about 150 basis points more than Treasuries. That way, the current average rate which is 6.25% (‘cause nobody can refinance today without equity) would then be lowered to 3.00% which will save the typical homeowner on a $100,000 mortgage, 3% or $3,000 per year (year after year after year). That’s $3,000 of extra cash flow to each person for MULTIPLE years ($3,000 per year), like stimulus money, but without costing us anything. (Yep, I’ll show you how.)

Now for the good part. First, there would be a major increase in tax revenues to the U S Treasury, because the home interest deduction is almost cut in half on personal tax returns from interest at 6.25% reduced down to 3.00%. That’s about $300 billion per year for each year going forward of reduced deductions on tax returns, saving the treasury a boatload.

Halting the flow of foreclosures is the main goal.     Making homes affordable is the only sensible cure.

Here it is.

It would be cheaper to live with a 3.00% mortgage than to find comparable rent for the same home. Really, I’m a mortgage banker, do the math. In fact, it would be a DEAL to homeowners. That fact would very probably cause property values to rise when people aren’t selling or abandoning homes! Property taxes would stabilize. A major portion of our citizens would be restored value by virtue of better cash flow. Yes, we need to fix our future mortgage system, but let’s restore homeownership value NOW.

Second, this “cure” eliminates our bankrupt trillion dollar + liabilities with regard to the Fannie Mae and Freddie Mac insolvency problem. They wouldn’t have any past guarantees to cope with. Actually, that would eliminate a huge burden off the shoulders of Congress and the Treasury. And, since we are ALREADY CURRENTLY on the hook for 100% of these AAA mortgage-backed security guarantees, it would be justifiable that instead of earning zero on our guarantees, that the Federal Reserve kept the paper (where is your capitalistic spirit? WE ARE ALREADY 100% OBLIGATED TO PAY FOR ANY AND ALL SHORTFALL ON EACH INDIVIDUAL MORTGAGE DEFAULT, LETS EARN AND KEEP THE INTEREST ON THESE LOANS!) . 

That would be $300 billion per year of new-found income to the U.S. government (you and me).

This 30 year mortgage paper averages a 15 year life (because of people moving and pre-payments, check it out), and gives us perfected 1st liens on residential homes, and pays out naturally by individual homeowners, spread out so much per borrower that even Michael Milken would be proud! In WW II, we took on $1 trillion of debt, unsecured. That was back in the 1940’s. With this plan, we’d have perfected 1st lien positions assuring timely and orderly pay back that would naturally pay out to eliminate the debt. No new spending of tax dollars is required for this plan! ($1 trillion in 1940 = $ ?? trillion in 2011?

1) So, the Federal Reserve, which pays zero for their capital, would then keep 3.00% on about $10 trillion, or an extra $300 billion in annual revenue. Its already our obligation, we are not increasing our exposure! (Yep, we are guarantors on $10 trillion of residential mortgage-backed securities (FNMA, FHLMC, FHA, VA, Farm Bureau, Rural Development, and mortgage agency bonds) Makes you kind of proud, eh?) If you were to think that the world, such as China, or the IMF, or the G-7 do not already categorize this $10 trillion as part of our shadow national debt, you are sadly mistaken. Recognizing it and using it to our advantage is a huge windfall.

[Sidenote: As it sits today, you and I (the United States of America)  have this $10 Trillion contingent liability with no asset on the asset side of the balance sheet.  This plan would change that by putting a $10 Trillion asset (fixed income securities/mortgages) on the asset side of the balance sheet of the United States of America (the Federal Reserve Bank to be exact), which would actually then balance out the $10 Trillion liability. As it currently stands right now, we just have the liability, but not the asset. Currently, not a healthy balance sheet.]

2) Couple that $300 billion in new revenue, and add to that the positive treasury tax effect to the IRS of lower mortgage interest tax deductions at 3.00% mortgage rates (versus 6.25%) on individual’s tax returns, and you are talking real money! 

3) Making homes REALLY affordable at 3.00% interest will stop much of the $120 billion of annual losses to the government (which is you and me) on Fannie/Freddie/ FHA/VA foreclosure losses since we currently make AAA mortgage securities investors whole on each foreclosed home sold.

SUMMARY:                                                                                                                                                   These three items are a Treasury benefit of OVER $400 Billion pocketed per year with no program cuts or raising any taxes. $400 Billion X 15 years = more than $6 Trillion! $6 trillion saved over 15 years!

And that free stimulus of $3,000 per mortgage at 3.00%? A separate $300 Billion stimulus received by homeowners having their interest rate reduced, and therefore monthly payments reduced, at the new 3% mortgage interest rate. $10 trillion  X 3% reduction on their interest rate = $300 billion! Annually into our economy! Huge and free! Could someboby please tabulate what effect that an additional $3,000 per year (every year going forward)  in positive cashflow to each average homeowner would have on our economy?

This creates new stimulus spending without hitting our fiscal budget! And it happens for multiple years!

I am proposing that we spearhead a congressional awakening to a real solution. Our national fiscal budget situation is so large that it is fortunate to have a "large" potential solution.

Sincerely,                                                                                                                                                                       A concerned citizen

***[Footnote: details below on facts about current foreclosure figures.