How to fix the Economy (without it costing too much)

Implications: The recently proposed bailout was an inevitable solution to a ever-growing problem. The $800B will be the most costly endevour by the U.S. government since The New Deal proposal from the Great Depression. The key to the issue at-hand is two fold: first, the stabilization of the real estate prices. Second is the rising (and continuation of) delinquencies and foreclosures. The pain HAS to be shared by the U.S. taxpayer AND the investing community. Here's a solution.

Analysis: The key to understanding the meltdown is to understanding the poor foundation for the mortgages that were given: likening it to the biblical proverb of building homes on sand, many people were given the 'American Dream' who mostly likely didn't qualify for their homes. Inevitably, they will be forced to make some life-changing decisions. Such people were put into their homes by either Alt-A programs (No Income/Stated Income), or by Pay-Option-ARMS. My feelings about both of these programs have been well-documented in previous analysis, but there is a solution.

The reality is that the investing community will not fall for the 'liar-loans' anymore: those days are gone. No one is going to believe that an Assistant Video Store Manager makes/made $95k (actual figures from a Countrywide applicant). However, if all the outstanding MBS  were resecuritized, taking out all the no-doc ARMS, Pay Option ARMS, and recast into a current fixed-rate mortgage amortized for 30-years, it would be like resetting the clock. The investing community would suffer because of the loss in revenue streams (temporarily), but can purchase these new securities with the confidence that the U.S. government will back the new issues for the initial 3-years, to guarantee performance (at least for a while). The MBS pool will be reestablished in aggregate dollar figure, there will be little replacement risk for rate, the performance should receive a AAA/Aaa rating because of the backing, banks will gain comfort in the performance of the mortgages, thereby relieving their ALLL figures, and the perception of a performance free-fall will be erased.

Secondly, and most painfully because I am a tax-payer too, is the cost of the true bailout. If the government uses the Fannie Mae/Freddie Mac property valuation figures to establish a negative-equity fund, this negative equity figure will be re-injected into the system through paydown of the mortgages. By paying down the mortgages with the negative equity differential, a home that is worth $250k but has a mortgage of $275k, will be paid down $250k. This paydown will set the LTV at 100%, but with the eventual appreciation cycle engaging, the home value should rise again, and the property values will stop this free-fall. This also reduces the tax-payers obligation from the fully delinquent/defaulted amount of $275k by a significant percentage. Painful? yes, but it is a workable solution.

Last, and most importantly, is the leap-of-faith that will have to be done by the investing community with this last 'bullet': a one-time, get-out-of-jail-free-card, forgiveness of all delinquencies and pending foreclosures. I know: we would be rewarding indiscriminately, but unless someone has the time to review each and every mortgage file, I find it hard not to approach this problem in a wholistic-fashion. The effect will be two-fold: first, and most obvious, the U.S. Consumer will be saved with this one-time absolution. A psychological reaction will/should spur confidence and hope in the future, which seems to be eluding many of us. Second, the banks that hold these mortgages can, at least for the time being, relax their Loan Loss Reserves, thereby improving their capital position, and return to profitability. I'm not sure what CNBC would do without the negative headlines continually screaming across my monitors, but I believe that if everyone, and not JUST the U.S. Consumer, swallows the painful medicine, we can unwind this mess quickly, efficiently, and start living our lives again.