Too important to fail

It’s been awhile since I’ve blogged, but the time is nigh to get back at it.

As I was talking to one of my friends earlier today about the whole meltdown and credit/housing crises, we inevitably ended up talking about how much money the government has spent trying to make this problem go away. At present, they have spent $3 trillion and committed $11 trillion. Those figures aren’t very significant when typed out like that though, so let’s see them with all the zeros at the end. That’s $3,000,000,000,000 and $11,000,000,000,000. holy cow, that’s a lot of zeros.

I want you to shift your focus away from the “too big to fail” corporate bailouts we keep bemoaning and instead focus on the “too important to fail” American homeowner. For almost two years now, I’ve been reading in various news publications that 18-25% of U.S. homeowners default “strategically”. That is, once a homeowner gets to a certain point of equity inversion (a fancy term for upsidedownness), his or her incentive to leave the house behind increases exponentially. For example, a homeowner with a loan balance of 105% of his home’s value might be 10% likely to default, but a homeowner who’s more than 140% upside down has been shown to default at a staggering 50%. To date, government programs have only addressed payment affordability and have done absolutely nothing to address a borrowers’ negative incentive to keep paying a mortgage that’s worth more than his house will ever sell for.

That got me thinking. What if, instead of worrying so much about payment modifications or company bailouts, the government went straight to the American homeowner? So I started researching. I found that there are 119,117,000 residential housing units in the United States. About 13,000,000 of these are seasonal or 2nd homes, but we’re going to include them in our analysis because they’ve lost value too.

So the math really is quite simple. Divide $3,000,000,000,000 by 119,117,000. You get $25,185.32. This is how much the government could have paid down your mortgage balance for all the money they’ve spent in the last 20 months. That’s a pretty killer idea, isn’t it? but we’re not done yet. Now consider the amount they’ve allocated – in other words, COULD spend – and the picture starts to really rock. You could get a check payable to your mortgage company in the amount of $92,346.18.

Is this not a better, help-America idea than throwing money at the likes of Bank of America, Chase, and AIG? Let ‘em go, foreclose on their CEO’s houses, and move on. Our American homeowners and taxpayers are far more important to the health of our economy than a few bloated banks that took on too much improperly calculated risk. In fact, the American consumer accounts for 70% of our economy’s growth. That means corporations – including banks – only account for 30%.

Dear President Obama: Please take note and take action!