Wall Street Hands Voters A Reality Check

The optimism of November 4 has been replaced by the simple reality of life. 

After plunging almost 500 points today,  having it’s 12th largest loss in history,  and being the worst plunge on the day after an election ever,  the stock market brought reality back to Americans.  Investors, a category anyone with a 401k falls into, were rightly skeptical of what an Obama Presidency will bring in terms of economic change.  Anyone who read his policy statements, there are only three of us, are not surprised by this drop.  Why invest money to make more money when you were told outright that the more you make the more you will have taken away from you by candidate Obama? 

Obama has already prepared the nation for his failures and his next run for the White House.  Forever the politician, Obama, in his acceptance speech last night, stated that it may take longer than 1 year or even 1 term to fix the “problems” in America.  Not quite the optimism his supporters wanted but as usual they were not listening to the words only the cadence with which he spoke.  But looking at the stock market today, Wall Street heard him and acted accordingingly. 

Reality is a bitter pill.

While John McCain was in Washington trying to pull a bailout bill together, Senator Obama tried to take credit for the bill by saying, from the campaign trail, that he was involved and pushing hard for provisions that protected taxpayers that were not in the original bill. What are these provisions exactly?  As usual Senator Obama did not give specifics. 

One of these provisions might be the requirement that the government try to renogotiate bad mortgages and lower monthly payements for homeowners that are in trouble so that they can keep their homes.  This sounds a lot like McCain’s HOME plan that is defined specifally in his JOBS FOR AMERICA plan on his website. 

Under the HOME plan 200,000-400,000 people would be able to keep their homes by writing down and retiring the existing loan the borrower has and replace it with an FHA backed HOME loan from a lender.  The plan also covers homeowners who are facing a reset or can prove that they will not be able to continue paying current rates in the future.   By doing this the government ensures repayment of the loans and can recoup billions of dollars currently being loaned to agencies like Fannie and Freddie.  In addition, McCain’s plan calls for more transparency and accountability for lenders, another provision of the bailout bill. 

Senator Obama, on the other hand, in his PLAN FOR AMERICA,  only provides a 10%  mortgage credit to homeowners who DO NOT itemize.  As long as you make less than $50,000 you will get back about $500 on your tax return.  In his plan Obama also highlights his introduction of the STOP FRAUD Act in 2007, an act that never passed committee in a Democratic controlled Congress.  In addition to these proposed reforms, Senator Obama wants to create a HOME score, create a fund to help “innocent” homeowners and restructure bankruptcy laws.  In the instance of the HOME score, lenders would have to develop a score that borrowers would use to compare mortgages.  Keep in mind no system currently exists and would have to be created in order for borrowers to be protected.  In the case of the fund Obama wants to create,  it would be PARTIALLY paid for by increased penalties on lenders who act irresponsibly.  The penalties are defined in his STOP FRAUD Act, the one lying dead in committee.  And do I really have to say how long it might take for Congress and Wall Street to restructure bankruptcy law? 

Taking credit or taking action?  You decide which is more imprtant.

http://news.aol.com/article/deal-reached-for-wall-street-bailout/188230?icid=200100397x1210456864x1200628120

Personal Responsibility 1776-2008 R.I.P.

As much as America may need the bailout,  if the bill comes out laden with earmarks and other spending that has nothing to do with the current situation, John McCain should vote against it. 

Personal responsibility is the only loser in this bailout.  Despite warnings from Alan Greenspan, John McCain, and even Presidents Bush, Chris Dodd, Barney Frank and others in the Democratic party did nothing to prevent the current situation.  Even Bill Clinton used his power of 20/20 hindsight recently to say that he pushed too far on relaxing housing regulations in the 90’s and encouraged Democratic support of these measures too much.  The American taxpayers will be protected in this bill but only from further inaction by Congress.  The fact will remain that they will not be protected from themselves. 

Even as Washington mutual was failing last week, I was receiving multiple credit offers from them in the mail.  This is a company I have never had any dealings with, nor ever sought any dealings from.  Yet I was faced with the prospect of another credit line in these offers.  Over the past decade Americans have fallen for these offers (I am no exception) hook, line and sinker.  Promises of low rates and long terms are attractive when times are good.  But as the housing market slowed and economic growth slowed (it has never stopped), Americans started to blame everyone but themselves for the credit crisis.  Whereas a year ago they could afford an adjustable rate mortgage and 2 of each brand name credit cards, all with pictures of their favorite teams or animals,  a year later they are faced with bankrupcy and are looking to the government for help all because they made bad decisions. 

America and Americans have made some bad decisions in the past decade.  This is not a crisis that started with Bush and will end with the saving power of Barack Obama.  The only way this crisis will be resolved is for America’s leaders to put together a bill that is clean and Americans themselves to look at their own situation and resolve never to go back.  John McCain is a believer in personal responsibility, just like President Bush,  but his back is against Wall Street on this bill.  But voting against a bill laden with earmarks or extra spending is the right thing to do in this situation, even if it costs him the election.

Yes, Virginia, There are Specifics!

Be warned, this is a bit long but it is specific.

In covering the failing banking industry and the mortgage mess,  the media has been throwing around words like disaster,  crisis, and dire like peanut vendors at a baseball game.  Their irresponsible use of these words has prompted many questions about what McCain and Obama would do as President to correct what is happening on Wall Street and Main Street.  Here are the plans of both candidates.  The information on Barack Obama’s plan is taken directly from his “Blueprint For Change” while information on John McCain’s plan is taken from the expanded issues section of his website. 

To provide relief for millions of people affected by the mortgage mess and the Wall Street debacle, Sen Obama has proposed a 10% universal mortgage credit that will provide $500 to about $10 million homeowners.  The credit will help those making under $50,000 who do not itemize their taxes. 

Additionally, Sen Obama will create a new HOME (Homeowner Obligation Made Explicit) score that will allow borrowers to measure their available mortgage options and will help them understand the full cost of the mortgage they enter into with a lender.  This provision would seem to help new borrowers more than those already in a mortgage.  It also keeps the borrower as the primary decision maker and leaves the burden of responsibility firmly with the borrower, which is where irt needs to be.  However, there is nothing to stop the banking and investment industries from manipulating this score just as they manipulated numbers to get people into the sub prime mortgages in the last few years. 

Finally Senator Obama has proposed, in his “Blueprint for Change”,  a government fund to help “innocent” homeowners.  While “innocent” is not defined by Obama I imagine that it means those homeowners who took out a bigger mortgage than they could afford on an adjustable rate loan.  This fund would be paid for by the money received from increased penalties on lenders who have acted irresponsibly (those lenders currently going under?) or those convicted of fraud.  While this sounds good because it targets the corporate greed Sen Obama and his colleagues hate,  the fund is based on  passage of what Sen Obama calls “his record” on this issue, the Stop Fraud Act. 

The Stop Fraud Act is a bill sponsored by Obama and Dick Durbin that defines mortgage fraud, increases funding for law enforcement (?), and enacts new penalties for those found guilty of fraud.  It also requires the industry to report suspicios activity, it does not say to who.  The bill has been introduced to committee and referred to another committee, it has not been passed by the Congress, nor is it close to a general debate on the floor.  By the way it was introduced in 2007 so I do have to ask where was his leadership on this issue?  http://www.govtrack.us/congress/bill.xpd?bill=s110-1222

Now onto Senator McCain. 

Senator McCain has proposed a “Home Plan”,  unfortunately HOME does not stand for anything cute like in Obama’s plan.  Under this plan, Sen McCain would offer borrowers the chance to trade an existing mortgage that they can not pay for a mortgage that is more manageable under a fixed rate and reflects the market value of the home at the time.  Of course there are restrictions but they favor those being hurt by their current situation.  Those restrictions are as follows:

  • an eligible sub prime loan after 2005
  • prove your credit worthiness at the time of the original loan ( something you have to prove any way if you get a mortgage the right way)
  • are delinquent on payments or facing a reset or show that you can not meet your current obligations and
  • can meet the terms of a new fixed rate, 30 year, FHA backed loan

Under McCain’s plan there is no H.O.M.E. score or federal fund that has to be passed first.  The plan has elements of a bill introduced by two Democrats (there is that record of bi-partisanship again), Barney Frank and Chris Dodd.  The plan does require banks to forgive part of the loan principle and write a new loan for borrowers but the other option for the bank would be foreclosure, an option that would probably cost them more. 

Borrowers under McCain’s plan also can apply by picking up a form at the post office or printing a form from the internet (is that a use of technology by McCain?).  From there once the request is sent in, the loan request is approved by the FHA based on qualifications and then sent to the bank where the homeowner has their existing loan who retires and rewrites the loan to loan backed by the FHA. 

Of course Sen McCain’s plan also addresses the speculators and financial market practitioners who handed out the sub prime loans in the first place.  If a bailout is needed, Sen McCain believes that it should come at a cost to the financial industry, not taxpayers.  A bailout would happen only to prevent failure and in return that institution would face greater transparency and accountability.  This is the case with AIG, an institution that, if it failed and did not receive a partial bailout, would affect people around the globe.  Perhaps the 9/11 commission Sen McCain has proposed recently would provide the transparency necessary to determine why the current situation happened and how it can be prevented in the future. 

There are the two plans in detail.  Of course I’m partial but as I see it, Sen Obama’s plan relies heavily on government and passage of bills and recommendations in Congress that have already taken over a year to go to committee.  Unlike Sen Obama’s plan, Sen McCain’s plan could be instituted fairly easily and does not rely on new penalties that have not been discussed in committee yet.  In addition penalties already exist under current banking laws (http://blownmortgage.com/2008/02/03/barack-obamas-mortgage-reform-policy/ for some insight) for lenders who engage in deceptive practices. 

Sen Obama specifically points out that 10 million homeowners will benefit under his tax credit initiative.  That is a far cry from the 200-400 million people Sen McCain is proposing to help immediately.  Make your own choice on this issue but these are the facts and plans as stated by each candidate on their official websites.  Hopefully, I will also be highlighting other issues in the future.