Bing's Stress Test -- One Pinkie

Stanley Bing writes about the horror's of refinance in the June 8, 2009, Fortune. He writes, "I'm happy to tell you that I did get my refinancing package through at last. And in the end, I don't think I had to sacrifice too much.
"It's amazing what you can do without a pinkie."
The bank already made the loan. Just drop the rate and move on.

Borrower is hit twice!

"Without naming BlackRock, federal auditors have warned that any private parties that purchase distressed assets on the government’s behalf could use generous federal subsidies to overpay, artificially pushing up the price of similar assets that they manage for their own portfolios.
“'In other words, the conflict results in an enormous profit for the fund manager at the expense of the taxpayer,'” Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program, wrote in a report last month." New York Times 5/19/09
The borrower is hit twice. (1) His taxes increase to pay for the federal program. (2) The federal program raises the "value" of his loan so that the bank is less willing to reduce the interest rate (it is no longer a "toxic" asset). Voila. Higher taxes and the same high mortgage payment.
Why are we picking on the U. S. home owners? Just reduce all mortgage rates now.

Mortgage Rates haven't dropped!

"After hitting a peak of 6.51% in July last year, the average rate for a US 30-year mortgage declined markedly. ... Also, the lower interest rates aren't being passed on to consumers, as seen from the 414 basis-point spread of the 30-year mortgage rate compared with the 3-month dollar LIBOR rate. According to Bloomberg, this spread averaged 97 basis points during the 12 months preceding the crisis." So, while other rates dropped, home loan rates did not drop as much. What is "as much?" 3.17% according to Bloomberg.

-Credit Crisis Watch: Has the Tide Turned? Prieur Du Plessis May 19, 2009 Minyanville

Chrysler and home loans

"U. S. Forced Chrysler Creditors to blink" Wall Street Journal headline May 11, 2009. The lenders were owed $6.9 billion. Mr Rattner said, "It's $2 billion, take it or leave it." That 29 cents on the dollar. "On Friday, the holdouts abandoned the fight as too costly, financially and politically."

Will Mr. Rattner now call the banks and tell them to reduce the mortgage principle for home owners to the same 29 cents on the dollar? The banks would come out ahead politically and financially if they merely dropped the interest rates on all home loans to the market rates.

If Reit's can do it, why can't the homeowner?

In the May 6th Wall Street Journal, a headline reads, "REIT's seize a chance to deleverage. at discounted prices." "Diversified Realty Corporation ... repurchased several of its bonds at 49% discount." The resulting profit impact can be spread over 5 years under the new stimulus legislation.

If a REIT can pay off its loan at 49% of its face value, shouldn't a homeowner be able to do this?

Wouldn't it be wisdom for a bank to merely drop the interest rates on all its mortgages to the current rate? Then the bank is more likely to get back 100% of its principle--not 49%.