One of my personal finance heroes, and nationally syndicated talk show host, Dave Ramsey, has posted an alternative to the $700 Billion dollar bailout plan.
Click here to view Dave’s Three Steps To Change The Nation’s Future.
Dave has created a Common Sense Fix (PDF) for how to get out of the current crisis. Here’s one suggestion that really caught my attention –
B. In order for a company to accept the government-backed insurance, they must do two things:
1. Rewrite any mortgage that is more than three months delinquent to a 6% fixed-rate mortgage.
a. Roll all back payments with no late fees or legal costs into the balance. This brings homeowners current and allows them a chance to keep their homes.
b. Cancel all prepayment penalties to encourage refinancing or the sale of the property to pay off the bad loan. In the event of foreclosure or short sale, the borrower will not be held liable for any deficit balance. FHA does this now, and that encourages mortgage companies to go the extra mile while
working with the borrower-again limiting foreclosures and ruined lives.
What do you think? Is Dave on to something here?
Big thanks to Imelda for sending me the link to Dave’s plan.
Mostly, he’s right. I would also suggest that the monthly payment be set to 28% of the monthly income and have the total amount of the loan be adjusted so that they don’t get a huge break from this deal – while they shouldn’t lose their house, they shouldn’t be rewarded for taking an ARM, either. If a borrower winds up with a 40 or 50 year term loan, that’s fine – as Dave says, they can pay it off early later.
All of my school loans add up to the total of most peoples mortgages. If his plan involves the rates on those getting lowered to 6% too I’d go for it.
Whilst that might be an interesting idea, I’d hate to see a figure for what that might cost on top of the $700bn.
Wow, I might go home and throw his book in the trash after reading this. I guess those who are irresponsible and SPENT MORE THAN THEY EARN would get a free ride?
I’ve been all for the removal of capital gains tax, or at least a 2 year suspension, in order to stimulate market investment and return some liquidity. As for the mortgages, I have been a supporter of sit back and enjoy the fall out. The plan seems somewhat fair, though I don’t like watching people who bought too much house in the hopes of refinancing get lower rates than I did for making a wise and informed decision. As to the golden parachute limitations, I am sorry to say they need to be imposed. One would think that companies would have imposed limitations themselves in order to promote good management and deter poor management, but long term fiscal stability was gambled for apparently high short term gains.
Though, if you are on the board of directors for any major firm, I would be willing to run the company into the ground for mere pennies on the dollar of what current executives are getting for it… I may also fail and manage to keep the company solvent.
@plonkee This would be IN PLACE of the $700 billion.. not ON TOP…
Fan of this site and Dave Ramsey.
Most of Dave’s plan makes sense. Insurance is a good option, but shouldn’t be the only option. Treasury still needs to be able to buy “toxic” MBS as they call them. Mark to Market changes are enormous and would prove benificial.
Allowing the Govn’t to buy MBS will in the end make money for the taxpayers. It is also BS about the govn’t owning your house and the country turning socialist. The GOV’t already owns HUD, FHA, VA, FNMA, FHLMC, etc. This is nothing different than what already exists. If fact, if it were not for the gov’t intervention in mortgages over the past 2 decades, home loan rates would be sharply higher.
Capital gain exclusion is good also.
As for the 6% fixed rate max for delienquent homeowners, take a wild guess on how many homeowners will stop paying their housepayment for three months if it is mandated by congress that at that time they will get a free 6% fixed rate, regardless of where current mortgage rates are at that time.
Since the average 30 year fixed rate over the past 10 years is HIGHER than 6%, this is a poor suggestion, and although I undersand the intent behind it, it would never fly.
Great, can I get re-fi’ed at 6% fixed? Oh yeah, I’ve never been late on my mortgage. No reward for me!
My home mortgage is 6.75 percent when they added on points to eliminate PMI and for a less than 20 percent down payment.
When I read this, that was one of the first things I thought….what would keep me from stopping my current payments on the mortgage to gain the advantage….
This bail out is outrageous .I will vote any representitive of mine out of office If they vote for it!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
I agree with Mary – this simply rewards homeowners who bit off more than they could chew. Why reward them for making a mistake?
Perhaps if there were some stipulations: Three months late as of October 1, 2008… or proof of financial hardship (i.e. health care expenses, job loss).
I think some are missing the point…
Instead of a $700 billion dollar bailout that we will ALL pay for, Dave is looking for some type of compromise – one that would help those who are close to defaulting, cost us all a little money, but will not cost anywhere near $700 billion… I’m not sure if this is the solution, but anything looks better than the current bailout bill…
NCN
Hi! This is the first time I’ve come across your blog, but I had to laugh. Who couldn’t make it on nearly 67,200?Why couldn’t someone save with that amount coming in?W e are a family of 3 & live on $16,500 per year bring home.We are not on government assistance either.What you make just seems so large an amount, according to most all families I know.I plan on reading your blog beginning to now .Lisa
Nope, Dave is on to nothing here. It’s not common sense, it’s nonsense. With the possible exception of the elimination of capital gains taxes, this proposal is the same bad bailout bill that the House rejected just a few days ago.
– Ramsey I: Insure subprime loans/mortgages
– Bailout 102: Insurance of Troubled Assets
– R1b1: Help mortgagees in trouble
– B109: Foreclosure Mitigation Efforts
– B110: Assistance to Homeowners
– B124: Hope for Homeowners Amendments
– R1b2: Cancel golden parachutes
– B111: Executive Compensation and Corporate Governance
– R2: Eliminate mark to market
– B132: Authority to Suspend Mark-to-Market Accounting
– R3: Eliminate Capital Gains Tax
– Bailout: Has tax provisions that affect institutions being bailed out, but apparently nothing about total elimination of capital gains tax
Additional thoughts:
1. Dave proposes insuring bad debt. These mortgages most likely already have PMI. And even if the govt insures these bad debts, why would that make it more attractive to investors? It most likely won’t. Bad debt is bad debt, insurance or not.
2. Insuring these bad debts will cost nothing if the banks are required to pay the premiums. Otherwise it will cost the taxpayer more than 50 billion.
3. Dave proposes canceling prepayment penalties and other actions. These people can’t refinance or sell because there is too much supply and no demand. Prepayment penalties have nothing to do with this. Refinancing at good terms won’t help those people who can’t pay because of job loss or other reasons.
4. Keeping the paper value of bad debt inflated by suspending mark to market won’t change the fact that it is still bad debt.
5. Capital gains tax. Dave claims that if the government says I don’t have to pay taxes on a capital gain, then I will sell good investments for big gains and then use the money to buy toxic debt. Sorry, wrong! I may sell for a big gain, but no way I’m buying bad debt with that gain.
@Lisa
Where do you live? I’m not sure how anyone could live on $16k in a major city without government assistance. In my area, a 2 bedroom apartment (nothing fancy) would cost between $14-18k a year alone. We spend nearly $18k a year on just our apartment and utilities (gas + electric). We have a small (700 sq ft) apartment with no major amenities (no dishwasher, no pool, no security, etc). And I don’t live in a great area. I spend over $3k a year on gasoline. Of course, some of that’s choice (i could work closer) and another $2k on car insurance. Of course, we choose to have 2 cars.
$67k doesn’t get you that far in Los Angeles. You could not live on $16k here without assistance or a free place to stay.
Yes,I too wonder where Lisa could live on so little!!!!! Rent in the Pacific NW is not cheap…even for something I could not live in!
Dave Ramsey’s ideas make a great deal of sense! It certainly would help “mainstreet” and not “Wall Street”!
Dave is absolutely wrong and this is a terrible idea.
1. let’s give people fixed rate mortgages to bring them current…hmmm, if they could have afforded a fixed rate mortgage to begin with, they wouldn’t be in this mess having taken out interest only, alt-a, arm, option arm, subprime mortgages to begin with. his assumption is that people can afford a fixed rate mortgage, which completely ignores reality. In the end, instead of letting people lose their homes, he wants to delay the inevitable.
2. Dave then wants to back these reset fixed mortgages with insurance rather than upfront costs. hmm, let’s go back to THEY CAN’T AFFORD THE MORTGAGES TO BEGIN WITH, which means we are going to be paying much more in insurance once those mortgages fail.
3. Let me get this straight, someone who defaults on a mortgage not only gets a second try from scratch but then gets to walk away scott free afterwards? where’s the lesson in that? or is the lesson, do wrong and then do wrong again because it won’t hurt you again. Hello, punish is designed to prevent a behavior. we are positively reinforcing bad behavior.
4. Dave then wants to suspend capital gains tax. let me see, how the hell are we going to pay for anything as a govt without the nearly $1 trillion in capital gains revenue since 95% of the revenue comes from the taxes of 5% of the population? how stupid is that. so instead of the $700b, he wants to forego over $1trillion in tax revenue? so $700b versus over $1trillion, let me see how my math is.
5. Dave then wants to suspend mark to market. let me see, ENRON and WORLDCOM come to mind. we don’t trust wall street because they lie, so what do we want them to do, put their own evaluations leaving the door for ENRON and WORLDCOM part II. Let’s not forget the compounding reason for this mess is that values of mortgaged backed securities were ficticious to begin with. So we are going suspend a mechanism that gives a real number for one that essentially gives us a ficticious one? yeah, real smart Dave.
6. cancel golden parachutes: ok, who the hell wants to be a ceo with that kind of a clause? it’s also quite amazing that the loudest amplifiers of the no golden parachute bandwagon is congress who have themselves a golden parachute funded by the taxpayer. pension and medical coverage for life with cola adjustments after only one term in office. i would much rather see restricted common stock issued, which would force execs to perform less their locked in shares tank. we still need to reward people for reaching the pinnacle of success in this country. limiting compensation packages does not do it. are they bloated? yes, so make their packages tied to the company and restrict their ability to sell shares for at least 5 years.
I thought that Dave’s plan was a great idea. It is too bad that no one in Congress would listen to him. Then again they are all broke anyway and won’t listen to common sense advice. Just look at how they spend money so foolishly. I think Dave would be a great Secretary of the Treasury or some sort of Budget director in the McCain administration!
@ Laura… I happen to be someone that had a great job and due to the economic collapse lost my job. I was able to find another like the one I had, then lost that one 6 months later. I was current on my home and had no problem till this all happened. I was even on Dave Ramsey’s plan of being debt-free. I was close, but married into some small debt and now we are struggling. Should I be punished for losing my job? I know several people that are struggling due to the economic collapse, not due to irresponsibility. I don’t want a free ride, but I wouldn’t mind a helping hand. If I was making the money I was making there would be no problem, in fact I would be doing better than most. While some of the people that this plan would help would be those that are irresponsible, it will also be helping those who fell on hard times and are sincerely trying to make things work. Saving half of us might help keep the nation afloat… leaving all of us with stained credit and no homes will do nothing but create more problems for the nation…
Besides, Dave Ramsey’s advice might just be what saved me to begin with. I might be in a whole lot more trouble if I had not strapped on my boots and trudged through the world of debt I was in at one time. We need his fresh advice and his voice across our airways offering hope to those who do and do not need it.