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Housing Plan: Minimally Offensive, Minimally Effective

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When the economic solutions presented by big dogs of the financial press coincide with those of a comedy news show, it may mean that the only idea left standing is to cure the ridiculous with the comically crazy. Personally, I'm not entirely opposed.

Common sense from the sidelines
Several weeks ago, The Daily Show host Jon Stewart pitched his own bailout plan to PBS' Gwen Ifill: "Take all the consumer debt, give us the money, but only for consumer debt and mortgages, we'll pay it back to them [the banks] … they'll have money, we'll have no debt, and the world will be made of unicorns and rainbows."

I could go for a unicorn.

Could it be that Mr. Finn, editor of Barron's, also liked the idea? He recently penned a front-page editorial describing a strikingly similar plan for stabilizing the financial system.

Mr. Finn's "straight-to-the-heart-of-it" (albeit slightly more refined) strategy sees the government giving $200 billion of TARP money to financial institutions that hold subprime mortgages, on the condition that funds be used to cut the nation's subprime principal by roughly 25%. Purportedly, this would give subprime borrowers a better shot at waking up at home each morning, and would provide banks with all-important capital, which could be used to offset losses, make investments, or help out struggling borrowers in the prime mortgage category.

Assuming that the game of curing economic ills with taxpayer money is a foregone conclusion (not one that I necessarily support), this approach seems to have actual promise of success.

Mr. Audacity: Come out, come out, wherever you are!
Alas, Mr. Stewart, Mr. Finn, and myself were let down. In announcing his mortgage plan this week, President Obama served up a bowl of soggy cornflakes at a time when the nation needs some real snap, crackle, and pop.

At a total price tag of up to $275 billion, including $50 billion that is already committed, the plan represents a tidy sum. However, the lion's share of that largesse --$200 billion, to be exact -- will be used to further capitalize Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) . According to the president, this additional capital will help keep mortgage rates low. As for the banks, a lowly $75 billion is available for a refinancing initiative, in which the government and the participating bank would share the cost of cutting struggling homeowners' rates. The thing is, bank participation is optional. At a time when JPMorgan Chase (NYSE: JPM  ) is itching to give back TARP money, I don't see many banks lining up to give the government more influence over their operations, regardless of federal incentives.

More than a plan to stave systemic financial risk, these policies amount to a weak gesture apparently designed to draw minimal fire from all groups.

Implications for investors
Frankly, I do not see this plan significantly helping the banks or their troubled borrowers. Consequently, Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) continue to look like poker chips. Accordingly, the indirect aid to tapped-out homeowners who are also struggling with consumer debt is also minimized. As such, Discover Financial Services (NYSE: DFS  ) , Capital One, and American Express (NYSE: AXP  ) , all of which have reported rising credit card delinquencies, remain the same powder kegs of risk that they were earlier in the week.

Not only does the plan fall short in arresting housing market decline by making bank participation optional, but it also seems to miss the boat by including an emphasis on reduced rates for new mortgages. In historical terms, house prices are still high. In fact, the S&P/Case-Shiller Home Price Index pegged home values as of November 2008 at having fallen only to 2004 levels -- this is in the context of residential real estate's 10-year 1996-2006 bull run. I question how many first-time homebuyers are waiting in the wings, willing and able to plunk down a 20% down payment.

In his editorial, Mr. Finn argued that "getting our financial system fixed is far more important than assigning blame or waiting around for a solution that is perfectly fair." Until the government can deliver on that philosophy, I would steer clear of anything financial or housing-related.

Other views on housing-market mayhem:

Fool contributor Mike Pienciak has seen plenty of rainbows but nary a unicorn. He does not own shares in any company mentioned. JPMorgan Chase is a Motley Fool Income Investor selection. Discover Financial Services and American Express are Motley Fool Inside Value recommendations. The Fool owns shares of American Express. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 22, 2009, at 12:37 AM, happyashell wrote:

    The President has released his plan to improve the economy. As usual it is complicated and does not reflect the real world. Please read the enclosed copy of the telegram I sent him on 2-15-09. I do not believe he has read it yet, since he has been out of the White House for the last 3 days. I need yours and the banking industries support to have my Alternative Stimulus Plan enacted. Please read it and have it analyzed. Your opinion and help would be greatly appreciated. The Alternative Stimulus Plan is much simpler and I believe it to be more helpful to solving the banking industries problems of falling collateral prices and economic contraction.

    My name is Leonard C. Tekaat. I am a retired Economic Analyst, Financier, Businessman, investor, author and former candidate for California Congress. I have over forty years in the financial and business world. For 28yrs I have been saying that there is a major flaw in our economic policies. The currant economic crisis could have been prevented if the changes I have been proposing would have been enacted 28yrs ago. That is not to say that we cannot correct the currant crisis. I would like to share a copy of a telegram I sent to President Obama and Treasurer Geithner.


    To President Obama and Treasurer Geithner:

    There is a major flaw in our economic theories. I want you to ask yourself three questions. 1.What is the first thing the Fed does to stimulate the economy? answer: Lower interest rates, this permits people and businesses to refinance their debt at a lower rate of interest, which in turn lowers their monthly payments, freeing up monthly income, which increases their disposable income. 2.Why did it not work this time? answer: Collateral prices were going down; banks or investors cannot refinance people’s loans, until the price of the collateral stabilizes. 3.How do we solve this problem? answer: We have the US Treasury, which is a not for profit organization, borrow the money from the Fed, just like the banks do and fund the refinanced mortgages, at near cost, until the collateral’s price stops decreasing. The Treasury would receive the cash flow and turn around and fund more mortgages, just like the banks do. When the economy is up and running again the Treasury would sell the mortgages to investors. The bank and the other financial institutions would arrange these new loans and mortgages or modification agreements. It has always been the 90% of the population who spend their money and pay their bills that brings the economy out of the recession. More details at www.American Read articles and comments by "happyashell" Sincerely, Leonard C. Tekaat author Inflation the Economy Killer

    News Release

    Economic Committee Petitions U.S. Congress

    The Committee for Economic Reform and a Better Economic Future petitioned the U.S. Congress today to hold open meetings to discuss and debate their Alternative Economic Stimulus Plan. Chairman Leonard C. Tekaat states the economic stimulus plan does not rely on a trillion dollar Jobs Program. In fact Mr.Tekaat

    states the stimulus plan they are proposing will not cost the American people anything over time. He said, “ Their plan relies on a few policy changes to lower mortgage rates by 2 to 3%, which will reduce most people’s monthly mortgage payments by 50% when they refinance their mortgages. There-by increasing their disposal income an average by $700.00 per month! That’s like receiving a stimulus check every month for 30yrs. With safe guards included in the plan the chance of another housing bubble is nil." He said, "Their stimulus plan also includes a policy that will help those homeowners that owe more on their mortgages than what the house will sell for.”

    For more information go to www.American articles and comments by happyashell

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