A Mortgage Guarantee Program Could Utilize Positive Multipliers to Overcome the Downward Spiral of Economic Events
By Martin Lowy
Summary
A mortgage guarantee program could restart the world's financial engines by counteracting
the negative feedback loop that currently seizes the world's financial system.
The guarantee program would offer lenders the opportunity to opt for a government guarantee of a percentage of the original appraised value of any mortgaged home if the lender agreed to reduce the interest rate on the loan and modified the loan in other ways to bring it into conformity with best practices. Penalties also would have to be forgiven. As an example, the Government could offer to guarantee 75% of the original appraised value of any first mortgage on a single-family home in exchange for reducing the interest rate on the mortgage to a fixed rate that is a small number of basis points over the 10-year U.S. Treasury rate.
The program would put a floor under the value of all U.S. mortgages while at the same time permitting hundreds of thousands of borrowers to meet their payments or meet them more easily.
The amount the government would guarantee must be based on a number that is known to the market in advance. The original appraised value is such a number. This market knowledge would permit mortgage-related securities to be re-rated and traded with confidence.
I cannot make a good estimate of what this program would cost. But the cost almost does not matter because at least 12 multipliers would leverage the benefits.
The Multipliers Are:
- Raising the value of all U.S. mortgages and mortgage-related securities.
- Increasing the real capital and liquidity of banks, thus permitting and encouraging them to lend.
- Increasing the value of synthetic mortgage-related securities.
- Generating tax revenues from banks and other institutions.
- Reducing the cost of the Bear Stearns, AIG, Washington Mutual, Fannie and Freddie investments and guarantees.
- Enhancing the value of the capital investments the Treasury has made in banks.
- Raising the ratings of bond and mortgage insurers, which in turn benefits the many types of institutions that use their guarantees, enabling them to return to normalcy.
- Keeping people in their homes and avoiding foreclosures.
- Generating the stimulus of consumer spending.
- Preventing communities from foundering as foreclosures reduce tax revenues and cause social disruption.
- Reversing the global psychology of the downward spiral.
- Generating tax revenues from increased economic activity.
It is not yet too late to spend Government money wisely. The available multipliers for placing a floor under the values of mortgages and mortgage-related securities are far greater than the multipliers that might be put into play by fiscal stimulus or additional direct contributions to the capital of banks or other firms.