LESSON 8 - Addressing a crisis

AN OUTLINE SOLUTION TO THE AMERICAN BANKING CRISIS

This video shows how to use the Risk Management Chart to switch borrowers from the LP System to the ILS System so as to rescue the Prime Loans and much of the Banking Sector,whilst permitting the Fed to raise the interest rate from 3.5% to around 8% for Housing Finance to rein in inflation.

Before viewing the video it would be a good idea to exercise the brain a bit by seeing what you yourself might have come up with as a solution. So:

Your Homework before viewing:

Calculate P% for a 30 year Mortgage at 3.5%

Find C% for the first year on that basis C% = P% - r% for an LP Mortgage.

Now using the Risk Management chart that you created in LESSON 3,

Draw in AEG% at 4.5% in year one.

Raise the standing loan line to 8%.

Add C% to that line and draw another line which will repay in the 30 year period (C% above the 8% standing loan line).

Now find a position on that line to the left of the AEG% line where you think you would get the lowest arrears rate.

Watch the video and compare your findings with Mr.Ingram's findings. And then scroll down to view the Comments or to add your own please. Please note that this solved only the arrears and repossessions problem for those with enough income and enough desire to stay in the home that they had bought.

Maybe some sub-prime people would have managed. Maybe most of those who  became unemployed as a result of the crisis would have retained their jobs and continued to pay because the banking crisis and property value drops would have been moderate. 

Maybe property prices would have sagged rather than crashed, allowing the regulator to mandate a rising level of D% or P%  for new loans over time as incomes rose and getting some normality back into the property market at a more moderate pace. Any questions?

PS. It is suggested that some home owners may prefer to have their mortgage wrapped up as a rent-to-buy facility thus hiding the size of the debt which can rise at times in such exceptional circumstances as these.

PPS American legislation allowing home owners to walk away from an "under water debt" (mortgage bigger than the property value), needs to be re-visited. Who benefits? 

Don't forget to read up on advice to regulators here

http://macro-economic-design.blogspot.com/p/new-guidelines-for-regulators.html

and  here:

http://dreammortgages.blogspot.com/p/ils-for-regulators-and-risk-managers.html

In short, during and after the coming recovery, post crisis, the Safe Entry Cost must be managed so as to prevent another round of  inflated property values.