Thursday, March 10, 2011

Bankers talking about moral hazard

Bankers talking about moral hazard is something like rapists talking about chastity.

The New York Times is reporting that Bank of America is refusing to write down mortgages, as they have been paid and ordered to do by the government.  Their main argument is moral hazard.  They believe it would be bad business to reward home owners who took out larger loans than they could actually afford.  Seriously.

Tar and feather is too good for these people.  I have a strict non-violence policy, but the gall of these people is pushing my limits.

They are busy paying billions in bonuses to themselves, the crooks who wrecked the economy, and they claim to worry about the moral hazard of rewarding someone else?

Their secondary argument holds a little water.  They claim to be unable to figure out who to give how much write-down to.  This boils down to claiming that they are incompetent.  "Oh, the figures are just too hard to compute."  I've worked with the mortgage modification program people at Wells Fargo, and I would accept the argument that they are incompetent to do the math.

Well, I'll help them out.  We'll make it simple for them.  Any mortgagee who wants it gets a free re-fi, on these specific terms--regardless of their credit rating, payment history, LTV, etc.  If they currently do not pay PMI then they do not have to pay PMI on the new mortgage, either.
* Take the current principle balance and refinance that amount for 30-years at a low fixed rate.
* The rate they get depends upon the amount of their current principle balance, according to this sliding scale:
- Less than or equal to $100k -> 3%.
- Between $100k and $150k -> 3.125%
- Between $150k and $200k -> 3.25%
- Between $200k and $250k -> 3.375%
- Between $250k and $300k -> 3.5%
- Between $300k and $350k -> 3.625%
- Between $350k and $400k -> 3.75%
- Between $400k and $450k -> 3.875%
- Between $450k and $500k -> 4%
- Between $500k and $600k -> 4.25%
- Between $600k and $700k -> 4.5%
- Between $700k and $800k -> 4.75%
- Between $800k and $900k -> 5%
- Between $900k and $1M -> 5.25%
- Between $1M and $1.5M -> 5.5%
- Between $1.5M and $2M -> 5.75%
- Between $2M and $5M -> 6%

Obviously the sliding scale will be endlessly debated and negotiated, but I think that the government could cram this down the mortgage companies' throats.  And I think it would do a tremendous amount of good for the economy.

I'll take myself as an example.  We're not in the moral hazard set.  We paid down 10% and took out an 80% and a 10%.  We owe less than the market value of the property.  We have never been late on a payment.  And our credit ratings are still excellent.  We've been in our house a few years.  We would take this deal.  Based upon that sliding scale we would save about $350 per month.

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