Pres. Obama, Need a Good Idea?

Citigroup, Inc. (C) and Bank of America (BAC) and so many others as well are suffering from huge quarterly losses from the worsening credit crisis. However, it appears that many lending institution managements (albeit not all) are more content to sit on their hands and let their mortgage borrowers default on their loans, and as a result shareholders continue to experience significant losses in to their investments.

Financial institutions (which continue to act more like Fagan than Oliver Twist) are prepared to queue-up for the next Troubled Asset Relief Program (TARP) installment (unless we are careful, additional funds will be needed).

It remains incomprehensible that many of these entities continue to price themselves out of the mortgage business. Why does it appear that mortgage brokers have a better handle on the market, especially when it appears lending institutions are pricing refinanced loans erroneously higher than a new loan (an aged relationship with a good pay record is less likely to go bad)?

To make matters worse, the credit card companies continue to reduce credit card limits to their customers, which in turn results in deterioration of credit scores, making the prospective borrower appear less desirable on paper. Credit scoring companies would like to see your credit card limit to revolving charge amount at less than 40% (25-30% of the card limit is our best guess). This would translate to $4,000 of debt for $10,000 total credit card limit.

For example: without warning, your credit card company cuts your limit to 25% to $7,500. The customer would need to immediately pay-down $1,000 and keep the debt level at $3,000 or less, as not to adversely effect your credit score. In application, this could cause many homeowners to be charged 100-400 basis points above the best rates possible (4.875% presently) and prevent refinancings from occurring. Unfortunately, this scenario is quickly becoming a sad and sickening reality.

We note that the Fair, Isaac & Co (FICO) credit score has a 300-850 point range. Moreover, approximately 75% of the FICO credit scores in the US are 650 or better presently. Unfortunately, we think that most institutions would deem it only acceptable to lend to individuals with a 750 FICO score (a much smaller group).

Our elected representatives (House and Senate) kept pounding on the notion that "home affordability" was at basis a moral imperative, which has now evolved into the "Everyone should keep their homes" mantra. Home ownership is not an inalienable right, but a privilege. So in all fairness, we as customers need take some of the responsibility for our own fiscal condition.

For 2008 were 2.3 million U.S. properties in the process of being foreclosed upon, more than 80% higher than the year-ago level. This has contributed to the 10-15% reduction in home prices nationally. Over the next three years, Alt-A and Option ARMs and other home loans coming due is expected to be about $2.0 trillion. At an average price of $250,000 per home nationally, that would be approximately 8.0 million potentially going into foreclosure. Therefore, in total there could be approaching $3.0 trillion in mortgages in or potentially going into foreclosure.

While it appears our other suggestions for the financial institutions to be fiscally responsible from October 17, 2008 have gone unheeded, we have devised another way to correct this issue. While we are not a proponent of just throwing money at any problem to make it go away, the government will have to take some of the risk and act immediately to stabilize the housing market and get the banks back to the business of lending in order to get the economy moving again.

As the Federal Government and our elected officials squandered $200 billion of the TARP funds by not making the financial institutions accountable, we suspect the remaining $350 million will not be enough to correct the problem. Unfortunately, we suspect the number should be increased to $600-700 billion, with the caveat that the financial institutions could only receive any funds once loans have been financed.

We suggest that the government aid come in the form of an approximate average 20% reduction to the original loan amount (the reduction reflects the compress that area was experiencing. This would create in effect 20% equity to the homeowner (which the bank use as an offset to write-down the loan to the new reduced level) with the remainder completely financed at the current lowest 15- or 30-year fix-rate loan (borrowers choice), plus no more than 0.75 points for closing costs.

So for example, an original ARM on a $250,000 loan amount would reset at $200,000 and using a 30-year fix-rate, the loan would be refinancing at about $1,100 per month, approximately the same for a 5.0% $250,000 loan.

So, if there could be potentially $3.0 trillion in loans that are foreclosure-in-process currently -- as well as Alt-A, Option ARMs and others loans coming due in the next three-years -- could go into foreclosure if we allow our financial system to remain obstensively frozen. Under our proposal, this would require $600-700 billion in government aid (approximately $100 billion for administration and the enviable hiccups that will occur).

We believe the government aid could potentially correct as follows:

Up to 75% of the Problem

1. Anyone in process of being foreclosed upon because they could not secure a loan and had a FICO score of 650 or better three months prior to the beginning of the foreclosure process, could immediately refinance their original loan, less 20% (government's portion).
2. Any borrower with a loan expected to come due 2009-2012, with a 650 FICO score or better, could immediately refinance their original loan, less 20%.

Up to 10% of the Problem

1. Any borrower with a loan expected to come due 2009-2012, with a less than 650 FICO score, could receive assistance from their current lender to improve their credit scores. If their FICO score is lifted to 650 or better - refinance their original loan, less 20%. If their FICO score is not lifted to 650 or better and there is no other lender available, the financial institution would start the foreclosure process.

Up to 10% of the Problem

1. Anyone in process of being foreclosed upon that had a FICO score of less than 650 FICO score was 650 or better three months prior to the beginning of the foreclosure process, could get a two-year window to continue paying their mortgage at the current rate and receive assistance from their current lender to improve their credit scores. If their FICO score is not lifted to 650 or better and there is no other lending source available, the financial institution would start the foreclosure process.

The Remainder

Unfortunately, not every loan can be salvaged. Regrettably, the remaining loans would go into the foreclosure process and sold off at a discount. However, a significant portion has been rectified, leveling at worse the same level of foreclosures currently in process but resolving the entire problem.

While this is less than a perfect solution (but then again neither were the Brady Plan or the Resolution Trust Corporation schemes perfect), we suspect it would be more favorable to the government buying the 10-15 largest U.S. institutions (consider the potential effects to the commercial real estate around the country. However, our plan pushes the responsible back to the lender and the borrower to resolve the problem in a fiscally responsible manner and prevents the looming potential financial Armageddon.

Read the full analyst report on C

Read the full analyst report on BAC