Dave Ramsey: The Common Sense Fix

[illone]

http://www.daveramsey.com/media/pdf/the_common_sense_fix.pdf

Years of bad decisions and stupid mistakes have created an economic nightmare in this country, but $700 billion in new debt is not the answer. As a tax-paying American citizen, I will not support any congressperson who votes to implement such a policy. Instead, I submit the following three steps:

Common Sense Plan.

I. INSURANCE

A. Insure the subprime bonds/mortgages with an underlying FHA-type insurance. Government-insured and backed loans would have an instant market all over the world, creating immediate and needed liquidity.

B. In order for a company to accept the government-backed insurance, they must do two things:

1. Rewrite any mortgage that is more than three months delinquent to a 6% fixed-rate mortgage.

a. Roll all back payments with no late fees or legal costs into the balance. This brings homeowners current and allows them a chance to keep their homes.

b. Cancel all prepayment penalties to encourage refinancing or the sale of the property to pay off the bad loan. In the event of foreclosure or short sale, the borrower will not be held liable for any deficit balance. FHA does this now, and that encourages mortgage companies to go the extra mile while

working with the borrower—again limiting foreclosures and ruined lives.

2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs and executive team members as long as the company holds these government-insured bonds/mortgages. This keeps underperforming executives from being paid when they don’t do their jobs.

C. This backstop will cost less than $50 billion—a small fraction of the current proposal.

http://www.daveramsey.com/etc/fed_bailout/index.html

Sounds pretty logical to me:).

[Mad Mike]

I like it. I've been mulling around a similar (but less concrete) idea since this started. Bail out the home owners instead of the banks and let the money trickle up. All of those home owners would then become a stimulus to the economy as a whole. The only thing missing is a regulations package for the industry to ensure it does not happen again.

:2cents:

[TimmySmith]

One issue with bailing out delinquents is that is penalizes non-delinquents. Re-issuing mortgages is a great idea, but give everyone the same opportunity. The guy who has managed to pay his 10% mortgage certainly deserves a 6% mortgage as much as the guy who is 4 months behind.

[GibbsFactor]

The only problem with this is the logisticis and the ability to actually do it. It will spin out of control and everyone with 5 bucks in debt will try to get on that gravy train.

The facts are that we are all over extended and taking out another loan is not a solution.

[chaddukes]

[Warning: lots of blah, blah with a point way down at the bottom]

This sounds great...and some of it is good. However, it doesn't acknowledge that borrowers are just as culpable for this situation as the brokers, lenders, etc. At every level there is someone talking advantage of the situation. And this particular plan is ripe for borrowers to defruad the banks. No bank would ever accept this program for risky borrowers.

Think of it this way. FHA loans are meant for lower income, lower credit borrowers, but have good rates because the borrower has to take the FHA insurance, and they have to show that they can afford the mortgage with a lower debt to income ratio that most mortgages would allow. Also, until recently, the mortgages amounts were pretty low. No one was buying a McMansion with an FHA loan. There are a additional safeguards that in normal market situations make FHA less attractive. Thus the risk is offset in most cases. These are not subprime loans, which lack most of those assurances.

Sub-prime borrowers by definition unable to fit into conventional loan programs due to higher risk. This could be because they went 90 days behind on thier previous mortgage in the last 12 months, or because they can't prove thier income, or because the home is of above average value for the area and they have poor credit, etc. These loans need to have higher interest rates to offset the risk. You accept that some will go bad and attempt to make up for it by getting higher margins on the ones that get paid.

[And here is the point]

So the bank tells Mr. Sub-Prime borrower that he is getting an 11.5% interest rate because he want to take cash against his equity while having a 55% debt-to-income ratio and two 60 day lates in the last twelve months while only being 18 months from a previous bankruptcy. But, then they have to explain to him that if he goes 90 days behind on the mortgage the 11.5% rate will automatically adjust to a 6% fixed rate....what do you think that he is going to do? And what bank is going to give out this loan?

Some borrowers are just risky, and some loans are going to default.

[PeterMP]

So the bank tells Mr. Sub-Prime borrower that he is getting an 11.5% interest rate because he want to take cash against his equity while having a 55% debt-to-income ratio and two 60 day lates in the last twelve months while only being 18 months from a previous bankruptcy. But, then they have to explain to him that if he goes 90 days behind on the mortgage the 11.5% rate will automatically adjust to a 6% fixed rate....what do you think that he is going to do? And what bank is going to give out this loan?

Some borrowers are just risky, and some loans are going to default.

As its been pointed out before thought it won't be that simple. The guy you described has huge credit issues anyway, but by going the 90 days late he's really going to hurt his credit and essentially going to over pay for things far into the future.

Short story, he is going to pay a penalty. Maybe not as drastic as one as he should, but if paying that penalty damages us all, is it worth it?

[zoony]

I'm no expert- but this does seem like a great plan-

6 months ago.

Seems like it's too late for something like this now.

[MurrayH81]

Two thoughts:

1. This is exactly what we need; dialog, discussion, and ideas. The problem with all of this is that a definition of the problem, and a crappy solution were initially devised and an attempt was made to ram it right down Congresses throat by the very people who are complicit in creating this mess (warnings of doom, fear invocations, short time to consider, pressure to just pass it from the Administration, etc.). (After listening to an interview with a Congressman from Texas yesterday on Bill O'Reilly's radio show -- where he stated that Secretary Paulsen told the Republicans behind closed doors that he has known that all of this was happening, going to happen for about 1 year -- and I am paraphrasing here, I don't remember the exact verbiage, but that's the gist).

2. The solution is obviously public problem solving via rigorous, structured analysis (not backroom lobbying and deal making). I believe that Americans are not panicking en mass. I believe our country will hold together while we use structured analysis techniques to problem solve, but it can't be done by anyone (politicians, financial insiders, policy idealogues, or just plain Jane/Joe citizens) in a vacuum. A fiscally prudent citizen has just as much right to help solve this as anyone else. Hysteria, fear-mongering and an artificial rush to "do something" are unlikely to help, may cause further damage, and are limiting our ability to solve this "crisis".

I applaud those seeking to promote dialogue and ideas without being Partisan or being fear generators. Three cheers for Dave R.

[PleaseBlitz]

I'm no expert- but this does seem like a great plan-

6 months ago.

Seems like it's too late for something like this now.

Yep. Sounds great going forward, if there are any investment banks left to actually implement it.

[BG]

I agree it might be a bit too late for this, but it's worth the discussion, without a doubt.

[PeterMP]

Okay, I'm going to be the contrarian. How do you know its to late to do this? It isn't like anybody was guaranteeing the $700 billion approach was going to work anyway. Heck, the director of the CBO said it could make it worse.

Isn't it reasonable to try something like this, see what the effect is, and then adjust accordingly?

[PeterMP]

Yep. Sounds great going forward, if there are any investment banks left to actually implement it.

If things are that bad (assets are that misvalued), then I honestly believe it won't matter, and the current bailout plan will be akin to flushing a large amount of that $700 billion down the drain and almost certainly shouldn't be done.

[USS Redskins]

One issue with bailing out delinquents is that is penalizes non-delinquents. Re-issuing mortgages is a great idea, but give everyone the same opportunity. The guy who has managed to pay his 10% mortgage certainly deserves a 6% mortgage as much as the guy who is 4 months behind.

Sounds right to me. Why not bail out everyone instead of just a few.

[PleaseBlitz]

Okay, I'm going to be the contrarian. How do you know its to late to do this? It isn't like anybody was guaranteeing the $700 billion approach was going to work anyway. Heck, the director of the CBO said it could make it worse.

Isn't it reasonable to try something like this, see what the effect is, and then adjust accordingly?

Because nobody is going to insure loans that have already defaulted? :whoknows:

[Zguy28]

Okay, I'm going to be the contrarian. How do you know its to late to do this? It isn't like anybody was guaranteeing the $700 billion approach was going to work anyway. Heck, the director of the CBO said it could make it worse.

Isn't it reasonable to try something like this, see what the effect is, and then adjust accordingly?

I think so, especially given the special nature of the cirumstances.

[PeterMP]

Because nobody is going to insure loans that have already defaulted? :whoknows:

You mean other than the federal goverment?

Well, it could be done in away that essentially insured the value of the property. You'd essentially make certain moldifications to the mortgage, if the person still defaulted, the federal goverment would kick in a certain amount of money as insurance based on a set "value" for the property vs. the amount paid on the loan and the amount based on any sale of the property.

The other way just seemed like it was going to end up with the federal goverment buying defaulted loans at above market values. Who else would do that?

[PleaseBlitz]

You mean other than the federal goverment?

Well, it could be done in away that essentially insured the value of the property. You'd essentially make certain moldifications to the mortgage, if the person still defaulted, the federal goverment would kick in a certain amount of money as insurance based on a set "value" for the property vs. the amount paid on the loan and the amount based on any sale of the property.

The other way just seemed like it was going to end up with the federal goverment buying defaulted loans at above market values. Who else would do that?

Yes, i mean other than the financial genius' we have in the White House and in Congress.

And im not saying it shouldnt be done. Im saying it SHOULD be done going forward, but right now, it doesnt really do anything.

[PeterMP]

Yes, i mean other than the financial genius' we have in the White House and in Congress.

And im not saying it shouldnt be done. Im saying it SHOULD be done going forward, but right now, it doesnt really do anything.

Well, it would certainly do less, but assuming assets aren't completely misvalued, I wouldn't say it does nothing.

The other thing it does, is you should be able to put a max potential loss for the federal goverment on this up front vs. this, 'well, we won't lose all $700 billion dollars.' stuff.

[MurrayH81]

I'm no expert- but this does seem like a great plan-

6 months ago.

Seems like it's too late for something like this now.

Ahh, there's the crux of the issue. Is it too late or not?

If we only have time to choose Yes or No on the current plan the House rejected, then we are screwed no matter what we do now. Might as well say No and enjoy watching the big guys squirm first before we all go down.

If we do have time to figure out what is broken, and discuss how best to resolve in a public way, then lets do that instead of taking the first proposal offered as a solution and basing everything on it.

[illone]

It's never too late to install a logical plan.

Never.

When I first read Ramsey's plan last night, I immediately emailed and printed/snail mailed this information to my local senators and congressmen. I live in AZ so McCain just received email from me.

This plan just makes too much sense. God forbid we stimulate the economy WITHOUT going into more debt:doh:

[mardi gras skin]

One issue with bailing out delinquents is that is penalizes non-delinquents. Re-issuing mortgages is a great idea, but give everyone the same opportunity. The guy who has managed to pay his 10% mortgage certainly deserves a 6% mortgage as much as the guy who is 4 months behind.

That's what I was thinking as I read this. Don't you have to reset everyone with a high interest rate to 6%? Otherwise, you've just punished those people who DIDN'T create the crisis.