Dear Dr. Bernanke,
I agree that longer-term permanent solutions may work better than shorter-term and temporary ones. But, I have an opposite suggestion as the one you proposed below in quotes. I also oppose to reduce interest rates for pre-foreclosure homes.
My suggestion is to reduce the monthly payment on a restructuring loan to an affordable level, and, depending on the reduction, the interest rate should be raised, not lowered. The foreclosure fee to the homeowner, if foreclosure has to occur, should be set higher after the restructuring of the loan. I have personally restructured several of the above type of loans.
A fair and long-term solution is not to give anyone anything for free. My suggestion asks the pre-foreclosure home owner to "borrow from the future." The home owner might see that the loan principal rises and the equity reduces or going negative, but the rest of the society will not be effect by this bad investment by the home owner through foreclosure.
You said: "Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure." ..."When the mortgage is `under water' a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure." ... "Measures that lead to a sustainable outcome are to be preferred to temporary palliatives, which may only put off foreclosure and perhaps increase its ultimate costs."
The current volume of foreclosures could be too large for any government program to handle because real estate is a big economic wave. The long-term and fair solution is for the home owner to be responsible for the problem and not to affect the rest of the financial world.
Most foreclosures are due to inability to pay. Thus, the reduction of the monthly payments is the right solution, even to a level which would gradually increase the principal. When the home appreciates, the increase in value of the home can easily wipe out the increased principal, and the home owner will just get less equity. Thank you for your kind consideration.
February 29, 2008
From the public dialogues on the current economic situation, I would like to point out two points: (1) Auction, not just foreclosure, should be our greatest economic concerns (2) The interest rate of a restructured loan should be raised, not lowered, in exchange for a reduction of monthly payment on a pre-foreclosed property (Lowering the interest rate would encourage pre-foreclosure.)
Generally, problems should be solved by solutions, not just ideas, and solutions must come from knowledge, not speculations. Our society needs to gather together the best thinkers to study the true condition and to predict the consequences of the current Subprime Woe. From my experience, the people are Milton Friedman, Gerard Debreu, Bill Kinnard, Kenneth Arrow, William Seidman, Alan Greenspan, Ben Bernanke. These people should start to discuss the current problem, not necessarily in formal settings. Unfortunately, Friedman, Debreu, and Kinnard are no longer with us, but I am familiar with their thinking. Except Bernanke, I have communicated with all of them. Anyone who can understand what we say can also join our discussions.
It is public record that our valuation system has predicted over-valuation of real estate privately in 1982 and publicly in 1984. Our valuation system World-Wide Investment System (Go WIS) on CompuServe found real estate prices far below the market price in the late 1980s, resulting in the great reduction in its subscribers; the System was predicting the US Savings and Loan Crisis. We have communicated with NSF, FDIC, RTC, Appraisal Institute, the Fed, and almost all the well-known real estate appraisers.
The California real estate market was stagnant from 1986 to 1991 and crashed in 1991 when the number of foreclosures reached roughly 500 in the San Francisco Bay Area and 2000 in Los Angeles. It is the auction of foreclosed properties which finally caused the real estate market to crash by about 35%. The real estate market recovered starting 1996.
The current Subprime Woe could just be the beginning of a real estate market downturn. Real estate price is generally very inflexible. In the S&L Crisis, it took over 5 years to finally for the price to collapse due mainly to the real estate auctions. Right now, the price reduction is due primarily to over-supply in the real estate market; the big crash will come only when the auction starts. The supply of real estates during the recent years is reflected by the growing of US home owners from 60% to 70%. Real estates consist about 60% of a nation's wealth; it is the big wave in economics. As far as I know, no one today has a deterministic solution for price, and the calculation for the rate of return can only be done after sufficient experience in determining the price. I developed the deterministic price system in the 1970s and the return calculation in the 2000s. Thank you for your help.
Sincerely, Hugh Ching
The Subprime Woe is caused by the oversupply of housing and the raise of interest rate to 5.25% in two years by Bernanke.
Post-Science Institute sent Bernanke an email in June of 2006 warning him of the effect of the high interest rate and the imbalance of the three economic rates, whose logic order should be:
As the interest rate rises, the rate of return decreases. The rate of return is an approximate time-invariant quantity; it changes slowly with time because investors' expectations changes slowly. Bernanke, thus, has changed the interest rate both too high and too fast.
The long-term solution for the Subprime Woe is for the Fed to observe the rational order of the three economic rates (Inflation Rate < Interest Rate < (Expected) Rate of Return). However, the Fed does not know how to determine the expected rate of return. The Infinite Spreadsheet, invented by the Post-Science Institute, can determine the expected rate of return.
The short-term temporary solution for the Subprime Woe is for the bank to lower the mortgage payments of struggling home owners to an affordable level in exchange for a slight increase of the interest rate, for the interest rate should not be lowered to a level below the inflation rate. The expected rate of return for real estate is around 10%. Increasing the mortgage interest rate from, say, 6% to 6.25% should not affect the home owner too much financially, but reducing the payment, say, from $2,500.00 to $1,000 could mean whether the homeowner can still live in the house.
The infinite spreadsheet is a non-violable constrain on human behavior; it is a law of nature in social science. For example, the short-term solution for the Subprime Woe is good for a finite time, but not good for an infinite time.
The short-term solution is designed to prevent the economic vicious cycle of Price Reduction to Foreclosure to Bank Auction to further Price Reduction to excessive Foreclosure to massive Auction to extreme Price Reduction, etc., etc. The positive cash flow resulting from lowing the mortgage payment should reduce Foreclosure, which is a key link in the economic vicious cycle.
The US government must act quickly to stop the economic vicious cycle due to the Finite Spreadsheet Instability, which is brought about by the lowing of the rate of return by a decreasing price when viewed from the point of view of a finite, not an infinite, time. The vicious cycle of economic downturns of the Great Depression of 1929 and the recent US Savings and Loan Crisis were both caused by the Finite Spreadsheet Instability. ### [End]
For more information on post-science, please click here.
Please contact Post-Science Institute by email: chien_yi_lee(at)universalcomputersourcecode.com.