Common Sense Isn’t So Common

I wrote an article back on September 24th for InvestWithPassion.com, before the $700 billion Plan (TARP) was approved - which essentially layed out the reason why we needed it and what the potential consequences were without it. (very informative article, you should read it). Shortly thereafter, the plan was approved and it seemed we were heading in the right direction. I don’t think anyone believed that the plan would immediately fix all the problems with the economy, however it was intended to be a start.

According to Neel Kashkari, Assistant Secretary of Treasury, the funds were to be used in the following areas:

Mortgage-backed securities purchase program: Identify which troubled assets to purchase, from whom to buy them and which purchase mechanism will best meet the policy objectives.

Whole loan purchase program: Identify which types of whole residential mortgage loans to purchase first, how to value them, and which purchase mechanism will best meet the policy objectives.

Insurance program: Establish a program to insure troubled assets (mortgage-backed securities and whole loans).

Equity purchase program: Design a standardized program to purchase equity in a broad array of financial institutions.

Homeownership preservation: When mortgages and mortgage-backed securities are purchased, every possible opportunity to help homeowners will be explored, including working with borrowers, counselors and servicers to keep people in their homes.

Executive compensation: The law sets out important requirements regarding executive compensation for firms that participate in the TARP - therefore define the requirements for financial institutions to participate in three possible scenarios: One, an auction purchase of troubled assets; two, a broad equity or direct purchase program; and three, a case of an intervention to prevent the impending failure of a systemically significant institution.

Compliance: The law establishes important oversight and compliance structures, including establishing an Oversight Board, on-site participation of the General Accounting Office and the creation of a Special Inspector General, with thorough reporting requirements.

Sounds like an overall solid plan with potential, right? Well, have you ever heard the term “bait and switch”? It is a term used frequently in the mortgage industry and it usually unfolds at the closing table. Clients (borrowers) are given acceptable fees/closing costs at the initial time of application, however when they get to the closing table (approximately 30 days later) those costs have increased considerably. Usually, because of the emotions involved in closing on the house, this change is overlooked (somtimes intentionally and other times unintentionally). This is an unethical way of doing business and many of my counterparts don’t see the problem operating as such. This is exactly what I believe Treasury Secretary Henry Paulson and the Kashkari team has done here. If you remember, Congress denied the bill several times partially because it did not include any relief for homeowners and it did not establish any restictions on “golden parachutes” for executives. And it was not moving at all until these issues were addressed - hence the final proposal laid out above.

Now in a recent press conference, Paulson states:

“As credit markets froze in mid-September, the Administration asked Congress for broad tools and flexibility to rescue the financial system. We asked for $700 billion to purchase troubled assets from financial institutions. At the time, we believed that would be the most effective means of getting credit flowing again. During the two weeks that Congress considered the legislation, market conditions worsened considerably. It was clear to me by the time the bill was signed on October 3rd that we needed to act quickly and forcefully, and that purchasing troubled assets - our initial focus - would take time to implement and would not be sufficient given the severity of the problem. In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks.”

In other words, we changed our mind and absolutely none ($0) of the $700 billion will be going toward helping homeowners as originally agreed upon. Now it seems to me that he never had any intention of deviating from his orginal plan which did not include assisting homeowners. Instead, once he realized that the original plan was not going through, he decided on the old “bait and switch” technique. I don’t understand, well yes I do understand, why Paulson and his team feel they can start to repair the problems with the economy without addressing the foreclosures - one of the underlying reasons we are in this perdicament.

I remember, a couple of months ago my brother borrowed my vehicle and I ended up driving his for a couple of days. While his vehicle was in my possession, the battery died on me. I had the vehicle towed to a service station and was told the battery had been drained due a faulty alternator. Now I had no clue what he was talking about and asked “so can I just purchase a new battery and be on my way.” The mechanic advised that I could obtain a new battery and the car will probably run for a short period of time, however if the problem with alternator is not addressed - the new battery will eventually be drained also. Eventhough I know very little about cars what he told me made sense, common sense. So I had the alternator and the battery replaced and the car was and still is running fine…

So if we apply that analogy to the current economic situation, essentially Paulson and his boys are trying the replace the battery without addressing the problems with the alternator. Doesn’t it just make sense, as opposed to giving the banks money (”strengthen bank balance sheets”) that they help the homeowners in foreclosure that are causing the bank’s financial problems? Can’t they see that if they start with the homeowners - that this will eliminate the bad debt that the banks are holding and therefore addressing the root cause of their financial problems - common sense. I can remember years ago, my grandmother telling me - “common sense isn’t so common.” As I’ve grown older, I see this more and more in everyday life. Could it be that people sometimes allow greed and power to control their actions? Or maybe it is as Jim Cramer (whom I love) stated a couple of months ago - “THEY KNOW NOTHING!”

Watch Cramer - THEY KNOW NOTHING!!!

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About the Author
AC Clinton, the Mortgage Closer, is the licensed loan originator, investor, author and entrepreneur. She believe’s that ownership of Real Estate, Stocks/Bonds, Business is the key to obtaining financial independence - Ownsomethingtoday.com.