RICHARD Bove thinks he has a solution to the housing crisis.
Several members of Congress seem to agree, and he’s been promised that his plan will be presented to President Bush.
Bove is a well-regarded Wall Street veteran and he is frustrated – as I am – by the lack of ingenuity in dealing with the current meltdown in real estate and the ensuing ripple effect through the credit markets.
The same old solutions just aren’t working in our debt-addled economy.
Bove, who now works for Punk Ziegel & Co., says “panic is not necessary.” But new ideas are.
Freezing mortgage payments, as the government is contemplating, will only prevent banks from wanting to make new loans and keep investors from wanting to buy real estate-related securities.
He says members of Congress are already looking into his plan.
“Some members of Congress have shown an interest in this proposal. And I was told it would be shown to President Bush,” Bove told me by phone.
“The Federal Reserve is also cutting interest rates in response to market demands, which is like closing the barn door after the horse is over the hill,” says Bove.
In other words, rate cuts are way too late.
“Let’s get back to the simple problem, i.e. too many people cannot pay their mortgages,” says Bove.
“The simple solution is to find a mechanism to pay the mortgages.” Once that happens, he says, the securities these mortgages went into will be able to trade again.
And all the other layers of securities built upon these mortgages will also start to regain their value.
What mechanism can be used to pay the mortgages?
“The homeowner goes to the bank and applies to refinance the mortgage that he now cannot make payments upon,” suggests Bove.
Rather than the bank taking over a home it doesn’t want, it qualifies the homeowner for a new 30-year fixed rate loan at 1 percent.
Bove says the government already has a program on the books called Section 8 of a federal housing law written in the 1970s to accomplish this and it’s not such a crazy idea.
The bank then sends the loan application to the Federal Housing Administration to be guaranteed.
Once the FHA guarantees the loan, the bank makes the loan and pays off the outstanding debt on the house.
The loan is then sold to the Government National Mortgage Association (GNMA) at a slight premium.
GNMA then packages the loan into a security and sells it in the marketplace at a premium.
Bove says the government will take the loss on the loan and the total bill to taxpayers could be $150 billion, roughly the amount of the recently announced rebate program.
But Bove says at least this will breathe some life back into the housing market.
*
A story on Bloomberg the other day lamented the fact that the Fed’s interest rate cuts “failed to lower borrowing costs for many companies and households.”
So the writer suggested that there would have to be more rate cuts.
Wrong! As I have mentioned many, many times in this column the real disaster will occur if the Fed loses control over rates because it spooks foreign and domestic investors by cutting aggressively and ignoring its mandate to control inflation.
So, let me suggest once again my idea for stimulating the economy when monetary stimulus from the Fed isn’t working and fiscal stimulus like tax rebates is of questionable value.
This is precisely why the US dollar has fallen so much in value.
Change the tax law so Americans with retirement accounts can withdraw a certain amount of money without penalty.
Let people spend their own money, not the government’s. The financial markets will rest easier with this solution.
What could they spend their Individual Retirement Account and 401(k)’s on?
The government can decide what areas of the econ omy need to be juiced. But certainly, they should be allowed to invest in hous ing.
It wouldn’t be so farfetched to allow purchases of cars and other big ticket items with withdrawn retirement funds.
What about the tax rebates so many people are counting on? Since the checks have already been promised, go through with the program.
But permit people to opt out and choose instead to spend their own retirement money.
Let’s say, a couple can turn down the $1,400 rebate and instead can withdraw $14,000 from their retirement account without tax penalty.
The trillions now stashed in retirement accounts will give the economy a real shot in the arm.
It is time for some new ideas.
*
The merger between Northwest Airlines and Delta could come as early as this week.
I’m hearing that both companies’ boards are meeting this week.
After that get ready for some additional combinations as the airline industry tries to deal with stubbornly high fuel costs.
United Airlines and Continental could be next.
*
I mentioned recently there would be risk in the esoteric filings that financial institutions are required to make with the Securities and Exchange Commission.
And in an earlier column I noted that auditing firms wouldn’t be very lenient this year if they found something on a financial company’s books they didn’t agree with.
That’s because, for the first time, the auditors themselves would be on the hook.
Both those thoughts came together recently when American International Group said in an 8K SEC filing that it would have to take a substantially bigger writedown on the value of insurance contacts it holds because Pricewaterhouse Coopers wouldn’t OK its financial report.
AIG’s stock got creamed.
Other financial companies will be filing 8Ks and, more prevalent, 10K annual reports in the weeks ahead. Look for more trouble.
