http://www.bloomberg.com/apps/news?pid=20601068&sid=aQJ5TomRjJ8k&refer=home

Now he says that he is no longer going to buy “illiquid” assets from banks. Isn’t that the main reason “we” approved the bailout because he said that the entire U.S. financial market/industry will fail if we did not get these bad assets off of the banks’ books? This is who Congress gave $700 billion dollars to? Priceless.

ARM loans were first created to allow banks to increase the interest rate they charged if their cost of funds increases. Greed caused banks to use indexes that caused ARM loan interest rates to increase much more than necessary, reasonable or fair. There is no justification for charging 11% or more on an existing ARM loan when new loans are being made at 6%.

A new replacement loan is not the answer for far too many existing borrowers. While they might be able to actually make the payments, they do no qualify if you consider the home value, their (negative) equity, credit score, and the costs to refinance.

The loan servicer cannot agree to modify the loan since, in most cases, they do not “own” 100% of the loan. Even with the Fed taking over Freddie Mac and Fannie Mae and buying “toxic” loans from financial institutions they will not own 100% of very many loans. Even if the party owning most of loan recognizes they are better off collecting 6% interest rather than charging 11%+ they can’t do much without potential liability to whoever owns the other pieces of the loan.

The answer is to give the Judge limited authority to convert a high interest ARM loan to a reasonable interest rate fixed rate loan. This could work if the parameters were spelled out clearly so there would be no reason for a contested hearing. For example: An ARM loan secured between 1/1/2000 and 8/1/2008 secured by a single family residence, condo, etc. that has an interest rate that has been, or within 6 months will be, adjusted to more than 7.5% may have their loan converted to a fixed rate loan bearing 6% for the duration of the existing loan with their payments adjusted as necessary. This could be done without a new appraisal, title report, credit check or loan fee and should benefit many borrowers.

However if you try to include the power to reduce the balance of the loan the plan will not work. Think this through. First, every borrower that is “under water” (loan balance exceeds what they think their home is worth) could be in a position to seek relief. Second, each matter would become a contested hearing to determine the home value and amount the loan should be reduced. There is no way the court system could handle that volume. Determining the value of most homes would be very difficult as well as expensive. It would take several years to have only a few of these resolved. If a borrower can’t afford to make their monthly payments how in the world could they afford a costly Bankruptcy lawyer and appraiser? Only the rich would benefit from this process and only if their loan was big enough to justify the expense.

Who benefits? I submit everyone does. Fewer foreclosures=less inventory of homes for sale=sooner recovery in home values. Paying 6% interest=a better loan on the books of a bank compared to an 11% loan in default. Reduced interest rate=lower payments so borrowers can afford their payments until their home value recovers. This is a fast, simple and inexpensive solution for many borrowers that helps in the financial recovery we are all paying for.

Shouldn’t we let the Saudi or Chinese offer to bail out AIG? After all they lend us the money that put us in this hole. I believe letting the countries with surplus funds take over one or two of our desperate financial firms is a great idea?

Happy New Year!