Plan Orange. Burn the Skunk. Immolate Mortgage Crisis. A Guide to 4 Stories and 3 Charts on the King Kong Debt-Killer.
Burn the skunk.
Kill the financial crisis. It’s simple enough. Pay down mortgage debt of all property owners to 80% of today’s value.
It’s a cool $5 trillion to pull this off; or it requires retirement of $5 trillion of “face value” mortgage debt (see chart). Not cheap. I agree.
Obviously it’s a crazy idea, but isn’t it logical for a crazy problem to have an insane solution? Don’t’ get it? Refer to the novel “Catch 22”. Then get back to me.
The purpose of this outrageous plan is to make mortgage debt affordable and to strengthen the owners of mortgages. It is defined more fully in the four stories and three charts linked immediately below:
It’s an overnight bankruptcy filing for high-debt homeowners with the clear end and obvious intention of reviving a consumer-driven economy. It also radically changes for the better the scary world of ruined mortgage investments. Our banks are sorting their lives out after decades of massive mortgage-drug addiction, and relapse is a very real risk.
The name of this plan is Orange — Plan Orange. It is instant death for our mortgage and housing disaster.
To begin with, it immediately eliminates fire sales, forced sales, short sales, foreclosure sales, and get-me-the-hell-out-of-here sales. It eliminates delinquent mortgages. Can I say that again? It eliminates all delinquent mortgages. Not a bad start, eh?
Get rid of all distressed sales, without artificially stimulating prices, and supply falls drastically. Have you heard of supply? It frequently affects price.
Any home owner qualifies. All ordinary means for qualifying for a mortgage are eliminated including the need for income, good credit, occupancy of the property and savings. Is the price tag reasonable? No. Do the persons who will benefit deserve the assistance? No.
Then why do it? The brutal logic of Plan Orange for Mortgages is that a wildly gargantuan debt destroyer must be deployed to blow up our gargantuan twin monster bubbles in mortgages and property.
Here’s our choice. Pay the bill now or pay it later. It still must be paid Jack. Why not kill the horse? Every leg is broken. Besides that, the horse is dead already. You can’t save a dead horse with four broken legs. Have mercy. Send it to the glue factory.
The smart way is the fast way. Plan Orange turns on a dime. Better to get back to business now. The world awaits our intelligent courageous leadership. Bring on the worst you can say. I will correct the formula, or answer your question.
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Trackbacks
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- Bill Gross Accepts Jesus. Bond King Embraces Debt-for-Equity. « NEW OBSERVATIONS
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I applaud your site and your efforts. I don’t applaud the premise behind Plan Orange.
I don’t think the ultimate goal should be to remove short-term pain at the expense of long-term gain.
Long-term gain is made through patiently saving, sacrificing in the present, and waiting for prudent opportunity.
Those who are modeling those traits should be taking their just reward in the present disaster; i.e., picking up foreclosed properties, using their savings to invest at a point of maximum return.
Massive re-payment of a bunch of underwater homeowners would prevent the more valuable lessons from being learned, thereby undermining a potential generation of much wiser consumers and investors.
In my opinion, the lessons to be learned from this disaster are worth more than the money that has been destroyed. The generation who went through the Depression became one of the greatest the world ever produced.
If we simply print a bunch of money and hand it over to underwater homeowners and over-extended lenders, we teach everyone exactly the wrong principles.
Hi Wade, the premise behind plan orange which says debt must be systematically destroyed following a credit bubble is correct. the premise which says it should be paid for with government money i think now is incorrect. debt destruction should be paid for by the owners of the debt. i wholly agree with you about all of the valuable lessons which we can learn from the failure and diminished material wealth we are now experiencing. thanks very much for your comment. mdw
Lemme guess: your own mortgage is underwater at 130% LTV….
As someone who managed his finances well, and has 60& LTV in a very modest house with no garage, formica counter tops, and no media room, I will offer an alternative to making responsible homeowners bailout underwater homeowners: make the banks do it.
Make the banks take the writedown losses on their own dang loans. Then use the $6 trillion to recapitalize new banks when the old banks go out of business.
Feel free to steal my idea.
Hi McMike, since writing the plan, i have come to agree with your disagreement. thanks for your comment. mdw
Michael, I have to say this an ill conceived plan. I have to disagree with your use of the words “brutal logic” when describing the plan. All this plan would do is monetize debt, drastically increasing inflation while creating yet an even greater bubble in the US dollar. It is, in fact, the easy way out. Those in real estate need to come to terms with the fact that the current situation was a creation of quantitative easing and artificially low interest rates that now have to be corrected. There is no way of morally getting around the fact that unwise lending institutions need to be allowed to fail and unwise borrowers allowed into bankruptcy. Like you showed in your real vs. nominal home price trend lines, we have a long way to go and the only productive way to do it will be to let those with bad loans face the consequences.
I think the more important thing is to reduce mortgage balances. I don’t if I agree the plan’s use of gov $ any more to do that. Thanks for the note. mdw
Why not have the government underwrite 1/2 All Americans (who have a) owner-occupied home mortgages regardless the size of the mortgage and let the borrow finance that at 1/2 the existing rate for the existing loan and then set up a wrap around mortgage with the payment of both loans going to the government collection escrow. (Well maybe a privately contracted collection escrow.) That will give the typical homeowner several hundred dollars per month to spend, and provide enough lowering of payment to inspire a huge number of sellers to stay put. The extra money entering the system will put each community on better footing and put people back to work. The government can use some temporary controls, i.e. when unemployment lowers back to 7%, disallow the 1/2 loans from being assumed. The government would have to subordinate to any assumed loans. The 1/2 loan rate would average over 2.5 percent….. I think you get the idea. I think this would be more fair as all loans can be affected.
There’s no question that the critical factor is lowering monthly debt payments. Thanks for your note. mdw
There likely is little disagreement that the amount of mortgage debt outstanding has to come down. But I think there will be a lot of disagreement about WHO should pay the price. The suggestion here seems to be to hold the borrower harmless, at the expense of other people, including a great number who did not make a bad decision to buy a house during the bubble. I am one of those who refrained. One of my children did not refrain. While I might be willing to help that child financially, I’ll be darned if I want my wallet raided at the point of a gun in order to do so.
HI Rick
thanks for your note.
I have no disagreement with the logic of your argument. My guess, however, is that we must leave behind what should be done. Plan Orange ruthlessly concentrates on what must be done — to put the crisis behind us. The plan is not fair to people who managed their finances well. Even if it is unfair, it may still be the smartest plan.