Stabilizing housing prices is widely accepted by most economists as the best way to solve the lingering recession and potential depression. Using the same $700 billion dollars, most of the current and pending foreclosures in the country could be avoided utilizing more practical rather than political strategies. If the past is prologue, by funding a Homeowners Refinance Act, similar to the one used during the Great Depression, we could multiply the effectiveness of the current Bailout Plan. However, this time mortgages could be made to homeowner’s in a subordinate lien position.

For example, banks could be given a profitable alternative to foreclosure by modifying the amount of their nonperforming mortgages to 80% of the properties current value with a new manageable fixed rate and payment terms. The incentive would be realized by distributing a 10% cash payoff to any existing lien holders in exchange for a 20% lien on the homeowner’s property. As a former mortgage and real estate broker that currently negotiates discounted mortgage payoffs, I can confidently say that most banks would prefer this strategy to foreclosure.

Simultaneously attacking the growing surplus of available homes, similar lending standards could be available to individuals interested in purchasing a home. The underlining political dilemma of making this “bailout” fair and profitable could be presented in the following manner: Participating individuals would lose their ability to receive tax credits for the interest paid towards their primary mortgage. Instead, that amount would be credited towards the 20% lien held by the government. With the average mortgage being less than $250,000, over 20 million homes could be saved or purchased using the same $700 billion. Systematically, this would significantly lower mortgage payments, increasing household cash flow, thus directly stimulating the economy through more consumer buying power.

Increasing real buying power as opposed to the borrowing power that some economic strategist call “tackling the credit freeze”, is a better long-term approach to maintaining a productive economy.

After acknowledging that the major investment banks who masked these mortgage-backed securities for so many years have either failed or converted to more regulated entities, the inappropriately inflated investor confidence is the only other major intangible deficiency plaguing the current financial crisis. The Bailout appears to be more focused on re-inflating that confidence than dealing with the catalyst causing the deflation. By identifying better alternatives, it is fair to say that the timing, magnitude and methodology of the Bailout Plan do not proportionately reflect its intended objective of immediately stabilizing the economy.

Makes for a good read about Quicken Loans.

The final thing about his plan that strikes me as odd or wrong. He proposes three types of mortgages. The first one is ARM’s with no cap. I’m a mortgage broker and I’m not aware of any ARM’s that I can sell from banks that don’t have caps. If I’m wrong on this please let me know.

To have no cap it must be a private party or owner carry. Then it gets back to the moral hazzard issue.