I just listened to the current U.S. Treasury Secretary Timothy Geithner layout his economic plan; the problem was, the only thing I really heard was that he would be getting us details in the next few weeks, a web site they are currently working on. I can’t take it any longer, this is getting ridiculous, all I know is that making money is harder, keeping a job is harder, getting a job is harder, and paying bills is harder. Forget about talking about home values or the real estate market.
The stimulus package the U.S. Congress is working on would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages.
The $9.7 trillion in pledges would be enough to send a $1,430 check to every man, woman and child alive in the world. And according to Congressional Budget Office data, this is 13 times what the U.S. has spent so far on the wars in Iraq and Afghanistan. Whatever….
Next, you would expect me to pull out the charts and graphs, but that’s not going to happen. I am not an economist, I am your next door neighbor, and you know the one. I am the one that has seen my property value drop like everyone else in America, the one that has a vacant house next to them, the one that sees foreclosures in the neighborhood, the one that knows people losing their jobs, the one that is unfortunately laying people off, the one that can’t get business loans, the one that is suffering many of the same economic issues you are facing.
Listen, I can’t give you the magic formula to a successful economy, but what I can do is tell you what I think would make a difference and that’s what I am going to do. I will let the smart people figure how we can do it. I hear ideas everyday and some are good, well thought out and some aren’t. Maybe my idea is one you feel is not well thought out, but that’s okay, at least I will get it off my chest and feel better about it. I just hope and pray that someone along the way gets a small idea from what I’ve written and that idea will make it into the system somewhere…somehow.
As I write this, Fed Chairman Bernanke is speaking on TV. I just heard him say something about what we are doing in certain areas is working. One of the senators just cracked a smile to a fellow colleague, rightfully so. I don’t know of anything they are doing to help me, my customers, friends or family. The problem is it is a trickle down effect from the top down and what we need is a flood up effect from the bottom up.
You want to make things take off quickly do something that helps the masses now, and thanks but no thanks, a $600.00 stimulus check won’t help anyone but Wal-Mart. So in an organized thought here is my basis for an economic plan form the bottom up.
First anyone in America that has a mortgage, let’s start with a primary residence, the federal government will take some of the bail out money and use it to help reforecast these mortgages. Yes, some will benefit and some will be penalized but in the end we all will be better off. As mentioned above, we have enough money to pay off nearly all mortgages. We don’t need all of the funds, so that’s good. Let’s reset all mortgages to 85% of the current tax assessed value, not appraised value but tax assessment. This does numerous things; one is that it gets consumers in a much more positive mind set. Do this and then let the University of Michigan do their poll on consumer confidence and I bet it goes up. Most people in America that own a home fall into a few categories; they stopped paying their mortgage and are awaiting foreclosure, they are paying but paying late, they’re paying on time but wish they weren’t, because all of these people most likely have the same circumstance, which is their home is valued less than what they owe.
By re-forecasting the mortgages to 85% of the current tax assessment, the banks will get a new loan, one that actually has real value. The home owner gets a mortgage with hope, one that they can now afford and one that has room to appreciate in value. The re-forecasted loan will be 30 years fixed at 5%, and assumable. The bank now has an opportunity to package the performing assets with real value and sell them to the secondary investment community. The federal government can provide some assistance, as already outlined, by assisting investors with low interest loans and guarantees. This cleans up the banks so that they can start making new loans.
The banks will not be bogged down with home loans and chasing down their assets through foreclosure, what they will be able to do is focus on getting money to small business, thus starting from the bottom. Allowing the money to flow to these small businesses will increase the opportunity for job growth. As to the re-forecasted loans, banks will give forbearance as to the difference of the original loan amount and the new re-forecasted mortgage. The government will waive any mortgage forgiveness rules and the banks in exchange will get an agreement that allows for the opportunity to recoup their initial investment or pass that opportunity along to the inventors that end up buying these newly re-forecasted mortgages.
So, if you have a home that was worth $300,000 and your loan was $280,000, with a current tax assessment of $220,000 the new re-forecasted mortgage would be $187,000. If in the future you ever sell your home you would owe the current lien holder of your mortgage the original amount of your current loan. That means sometime in the future the bank would have the possibility of collecting $93,000….no interest, and basically this would go to the government since they are backing the loans.
You may add a formula that includes an appraisal to go along with the tax assessment so that you could re-forecast the loan based on appraised value or tax assessment, whichever is lower. That way you get an entire industry back off the ground; this would open the door to tens of thousands of appraisals immediately.
Mortgages and Home Equity Lines of Credit (Helocs), would be wiped out under my plan, but only up to 85% of the tax assessed value. So, if you are under 85% of the tax assessment you wouldn’t get any help other than the fact that the homes around you go from vacant to occupied, foreclosures are stopped in their tracks, and home values start to appreciate again. Furthermore, the economy gets better, which should be enough help for anyone. The institutions forgiving their 2nd mortgages and Heloc’s get a tax credit for the forgiven amount to use toward their tax liabilities. The mortgage forgiveness rules would be waived for these as well.
Next are the people that don’t own a home and feel they are getting the short end of the stick. No problem I got something for you too. The government will offer a 100% LTTA, not LTV, this is Loan to tax assessment not Loan to value. It can be 100% of tax assessment or appraisal whichever is lower. The rate is at 5% fixed for 30 years and assumable. You have to show that you can pay the mortgage. This is not a low or no document loan it is a full doc loan.
This gets the housing industry off and running, as well as the new home market and quickly eliminates bank owned properties from their inventories. Lots of benefits to the industry here, title companies, real estate agents, builders, laborers, banks, local and state income increases through taxes and closing cost. Wow, this would really stimulate the economy quickly and starts from the bottom up, it helps all of us. Even the Fortune 500 companies and the big “fat cats” sitting behind the helm of these companies will benefit.
As a spillover from all of this, local and state governments can start to get back on their feet by having a new tax base, new homes sales coming out of the banks foreclosure departments and increasing the taxes collected by these governments. Better yet, because the homes are all backed by loans based on 85% of the current tax assessment, there is plenty of room to start seeing appreciation, literally in the next tax year, thus helping out these local and state governments by allowing them to increase their tax base.
Let’s talk credit; all the way around, this is a thorn in my side and one I see lots of questions from people on this topic every day. We don’t need a band aid for our economic problems, we need a long term solution that will ultimately make us better off as the great country that we are. I don’t want to be like Japan and be talking about the lost decade. Basically the 90’s were lost in Japan because they waited too long. We are moving in the right direction but let’s finish this now.
The federal government will come out with a new credit scoring system. YIKES, I hear it already from the lobbyist, and from the worthless blood sucking credit reporting agencies out there. I say keep your mouth shut and leave the elected officials alone. The credit scoring system is a scam, it doesn’t work and it is time to fix it. The FICO score is one of the reasons we got to the point we are today. The government can create its own scoring system even if our tax supported government competes with the credit reporting agency - I say great! You want to play you have to pay. You want money or help from the government then you will have to use the new government credit scoring system.
Anyone that has had a foreclosure on their credit report during the last 24 months will have it removed, purged from their credit file. No longer does bad credit stay on your credit report for 7 years, we change the 7 years to 4 years. Of course, the entire credit reporting system needs to be overhauled. If the credit reporting companies can charge you to keep your credit clean let’s have a federal credit reporting agency and pay them. The money can go to help reduce the national deficit. The credit reporting agency can’t complain about it, competition is good for everyone. This restores even more confidence in the American public. Some people will take advantage of this and some people that should not be borrowing will but in the end it makes consumer confidence sky rocket.
That brings me to jobs; consumer confidence goes up, credit extension is restored, people’s homes are now sitting with appreciation. What do you think will happen? People will go out and spend money, when they do, business will need to carry more inventory, they will need to hire more people, manufacturing will have to go up to keep up with supply, and you get jobs, lots of jobs. Businesses are making money again, and when they make money they pay their employees more, everyone is happy, and our economy is thriving.
To make sure that we don’t end up where we were and are, we have to put checks and balances in the system; eliminate low doc loans, eliminate no doc loans, and eliminate creative adjustable rate mortgages. You buy what you can afford. You need to refinance…no problem you must have equity in your home. The forgiven debt on the re-forecasted mortgages, seconds and Helocs, can be negotiated on the refinance. But in the end the home must stay below the 85% loan to tax assessment, you can’t borrow more than 85% of tax assessment.
The rest is hard and easy, meaning you can’t have a budget and maintain spending if you don’t have money coming in. Let’s start with the states that are going out of business. Have the government step in and give the states zero percent loans, a giant debt consolidation loan, BUT the only way that the states can do this is to present a balanced budget within 90 days, much like congress required the car manufacturers to do. They gave the car manufacturers a bridge loan, told them to come back in 90 days (which they are about to do) and when they show them a balanced budget and a feasibility of success for their business model the government they will loan them more money. We should do the same thing for the states. Of course, once you do this you get jobs flowing again on the state level. The money that is ear marked for infrastructure will now get the states to focus on the job at hand instead of playing a shell game with cash flow.
And speaking of infrastructure, I don’t know all the numbers but I read somewhere that we are planning on spending about $38 billion on infrastructure in the U.S. in the coming years. Thirty Eight billion, are you kidding me? I am talking about pure infrastructure projects. We should double or triple that amount! It can’t hurt, it creates jobs, some states will get more some will get less but let Congress fight it out. The only caveat is the money, if for pure infrastructure, no pork. I saw China was spending $40 billion just on telecommunication infrastructure growth. One special area of infrastructure and they are spending more than we are. We are spending less than China on our entire infrastructure growth!
More on a balanced budget, as we start to cut those much needed projects and hard to make decisions on programs, we have to remember just like in business, if you wait too long to cut it’s too late. Cut now so that you can be around to build later. You will be able to add these programs back as you make more money but for now you have to get to a balanced budget. You will also have an easier time to plan for your budgets on a local and state level as everyone is living in a home that is 85% of the tax assessment. The appreciation will kick in quickly allowing for more revenue, all the real estate closings that will be taking place will help the tax income go up for the local and state governments.
Now for some not so exciting tax increases. Overall we cut taxes, maybe even consider a flat tax. They can argue this one in Congress too, but what we want to do is get everyone paying their fair share and increase taxes on things like cigarettes. Cigarettes kill you and kill everyone around you. So, if you want to smoke them, then you can pay more per cigarette. Use the extra tax money for the governments on a state level, as the tax collected would be higher in areas of where more smokers live thus creating more of a burden on a particular state’s health care systems. Some of the taxes can be used to help people break the habit, lowering the tax collected in the long run, but exponentially lowering health care cost.
Increase tax on alcohol; all the same reasons for smoking apply to alcohol. It kills people; people who drink it and people who don’t drink it. You want to roll the dice then you have to pay to play; I don’t mean a small tax I mean an increase of, 20-30 percent. Yeah, I hear it too. The lobbyists are screaming at the top of their lungs… too bad. Smoke a cigarette and drink a beer, great but we have to raise money. A “use” tax is better than a general tax, everyone pays their fair share of taxes, but use taxes are for the people that specifically use a certain product. I am not opposed to increasing sales taxes across the board. We need to promote savings not wasteful spending.
The wasteful spending and carefree borrowing mentality of the last 25 years is why we got here. We need to be a nation of savers. Yes, this contradicts some of what I said about increasing consumer confidence to get people spending money but that is natural, and people will spend when they feel better. What we need to do is to get people to think before they buy. Do you really need a new refrigerator, or are you better off saving for your children’s education. I can guarantee you that if you do the above, people will go out and spend money to stimulate the economy and they will be able to find a job.
The best of both worlds - a job and stimulus. Government, wake up! This is your wake-up call; we need stimulus from the bottom up not this high level garbage I am listening to on TV. I listen to it every day and I have no idea what they are saying. Just give me a job!
Happy Investing!
All my best
James Dicks
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