An article by Peter Schiff, who is president of Euro Pacific Capital and author of "The Little Book of Bull Moves in Bear Markets" made a rather unusual proposal for those people on the edge of foreclosure.
If you are a mortgage holder who is either struggling with crushing payments, bitter for having overpaid for your home during the bubble, or who has extravagantly refinanced when prices were rising, the government's landmark $700 billion bailout package has an important message for you: stop making your mortgage payments . . . immediately. Furthermore, if you believe that with some planning and sacrifice you may be able to meet your mortgage obligations, the government's message is clear: relax, don't bother.
The "bailout" may well be a gift to the corrupt, greedy Wall Street manipulators but it is also a gift to the homeowner that has been laid off or had large medical expenses and has difficulty making the mortgage payment, the uninformed buyers who were duped into snake oil loans that were impossible for them to maintain and the irresponsible home owner that tapped all their equity on the top of the bubble for instant consumer gratification and now owe $400,000 on a house worth $250,000.
Nobody likes foreclosure, least of all politicians. The new law clearly indicates that the government will make major efforts to reduce foreclosures through "term extensions, rate reductions and principal write-downs" of the troubled mortgages that it buys from the private sector. In other words, your new landlord will bend over backward to keep you in your home. The legislation telegraphs this by including a provision that extends until 2013 the exclusion of loan reductions from taxable income
Private institutions have a responsibility to their shareholders, as such, they will take whatever action necessary to recover as much of their principle investment as possible when a loan defaults. In most cases the only option is foreclosure.
The governments (politicians), on the other hand, have no shareholders. They do, however, have constituents who are, for the most part, pissed off over the bailout of the fat cats on Wall Street. The specter of constituents being thrown out of their homes on top of that would be a political gun to the head.
As the government plans to buy up the crappy paper from the mortgage holders, the crappier a loan is the quicker it goes in the buyout pile. That is because, in those loans, foreclosure would not recover the principle investment. So, the message from the government is – make your loan as crappy as you can. How to do that? Don’t make payments.
There is a downside, however, for the borrower that has been responsible, made all payments, has not taken 2nd mortgages, made a sizable down payment and is having a difficult time making their payments. For that class of loans, foreclosure would be profitable to the mortgage holder, so they will keep it on their books.
If your mortgage does become the property of Uncle Sam, the growingly popular impulse to "just walk away" should be replaced by "just stay and stop paying." No one will throw you out. After a few months, or years, of living payment free, you will get a call from a motivated government agent eager to adjust your loan into something affordable.
Now it would help things along if you were able to claim poverty, so get rid of that savings account, CD or any other liquid asset and put the cash (or better gold) under the mattress. Or go out and spend it – after all consumer spending stimulates the economy – one could argue that it’s your PATRIOTIC duty to spend, spend, spend.
Once you have impoverish yourself (at least on paper) and have a upside down mortgage, Uncle Sam will pick you up in a flash. The author also points out that using the money saved to pay down that $30,000+ credit card debt would be stupid.
If you do get the opportunity to live for a while with no mortgage payment, don't make the tragic mistake of using your extra cash to pay down your credit cards. As the growing level of credit card defaults will soon push credit card companies into bankruptcy, we can expect a similar bailout plan for American Express and Discover Financial. When that happens, expect massive balance reductions for Americans who can demonstrate the inability to pay. The bigger your balance, the greater the benefit.
Taxpayers, however, will take this in the shorts (who else pays for government fuck ups?) because the government didn’t factor in the benefits there might be for those who decide to quit paying. Funny they missed that, considering what a financial genius that Paulson is.
A meme that is circulating is that the government could actually turn a profit on the program. The chances of that are as likely as Saudi Arabia denouncing Islam, buying up a bunch of pig farms and becoming the 51st state. To make a profit (or break even) they would have to buy the bad paper at a deep discount to the actual loan value, that in turn would bankrupt most of the institutions they are trying to rescue.
More likely, they will buy the paper at or near face value which, in turn, results in the 700 billion bailout becoming trillions – need I point out who will be paying the bill.
This entire mess, created by Rethug deregulation, lax government oversight and greed and corruption on an uncheck market, will be taken on by the government to find a solution - they could turn the financial nightmare into a full length horror movie.