The actual economic bailout of Wall Street and the individual homeowner bailout by Jeffrey Fu - Essay Example

Comparing and Contrasting the Actual Economic Bailout Plan Of Wall Street with the “Individual Homeowner Bailout” Proposal by Jeffrey Fuhrer A rash of defaults coupled with foreclosures hit homeowners, and it started with subprime loans due to credit crisis. The low-interest rates and the common perception of home ownership as a safe way to invest in the beginning of this millennium made many home owners to run to this type of investment. The federal regulation kept the interest on the loans low, which gave room for Fannie Mae. Its counterpart, Freddie Mac, bought billions of dollars and then fed the market to feed them, of which they were risky mortgages bought. The subprime mortgages initially aimed at borrowers who had low or poor credit cases or histories. A great number of people invested and went into a great deal of debt, since the house prices were high till when they started dropping, which brought about the huge losses (NRCC 1). This paper is a comparison and contrast of the actual economic bailout plan of Wall Street and the individual home owner bailout plan. Mortgage meltdown is a common term used to mean subprime mortgage crisis due to the credit crisis in 2008 (Bianco & Pachkowski 1). There were two proposed bailout plans. First was the Economic Bailout Plan of Wall Street announced by Henry Paulson, that holds reverse auctions (Miron 5). A newer expanded version of the bill passed included the buying of equity positions in the banks, reducing the interest rates and expansion of the deposition insurance. The other plan is Individual Homeowner’s Bailout Plan that has two versions where in one version, the government helps by giving a loan paid as soon as one is financially stable, and the other comes in form of a government grant. In both cases, they don’t involve the principal reduction on the value of the house, and payment is done directly to the mortgage provider. The government share is the same as the percentage reduction in the income of the home owner and it ceases when the financial state is restored. The economic bailout plan has the reverse auctions whereby they buy the assets troubled or in debt of the home financial institutions. Also, the use of taxpayer money to buy equity positions in the country’s biggest banks. All these are aimed to try to stabilize the financial markets and avoid the eventual bank failures and credit freeze that comes with it (Miron 7). This approach is aimed at taking the taxpayers money to the investors and insured depositors. The home owners on the other hand will keep on plunging into deeper debts. The individual home owner’s bailout plan uses the taxpayer’s money just as the economic bailout plan, but in this case, the government uses the money to try to keep the house with the home owner in either giving a loan or as grant. In case of failure to pay up, the house is put up for foreclosure (Foote, Fuhrer, Mauskopf & Willen 2). At the end of 2005, the housing industry became expensive and this in turn would trickle down to the banks, hence the need to make a plan to avoid the collapse of the major banks came to play. The economic plan stated the buying of equity positions in the major or bigger banks using the taxpayer’s money. The plan allowed for the buying of equity positions to Freddie and Fannie in case of a collapse or destruction, using the taxpayer’s money. This will create a separate entity that is a regulator to Freddie and Fannie, and Federal Home Loan Bank system (NRCC 2). This in turn raises the debt pool. These government institutions enjoy a great deal of bailout money, but there is also the fact that cannot stop the decline of these institutions, and still need an increase in the bailout money (Weiss & Larson 1). The individual bailout plan focuses on the home owner and uses a different approach to get the same results. This approach is designed to help the home owner raise money for the mortgage, and the fact that it is directly paid to the mortgage providers, makes it easier to meet this goal since it helps keep the financial institutions running, and the payment on the government loans also returns the money back to the bailout plan. These economic plans also have reduced interest rates. According to the economic bailout plan, the interest rates were initially higher due to the fact that they spent a lot of the money on providing safety nets for the bank investors (Weiss & Larson 1). The individual home owner’s bailout plan also has a way to balance the loan and the interest rates in the sense that it provides a situation where the government loan is directly proportional to the risk incurred to lend the money to the borrower, which is practically higher than that of the prime mortgages. This system deters the borrower from taking it for granted the co-sharing of the payment program and taking unfair advantage of the program (Foote, Fuhrer, Mauskopf & Willen 2). Then, the expansion of deposition insurance comes after. The increase of the deposition pool from $100000 to $250000 for protecting or insuring the accounts for the small and medium-sized businesses is in the economic bailout scheme as a fail-safe plan for the protecting the banks, since they might be required to increase their premiums (Bianco & Pachkowski 3). In the case of individual home owner’s plan, the protection comes in the way the government helps in the paying of the deficit in the mortgage by paying the percentage amount equal to the home owner’s income, which still safeguards the account of the home owner. The government later ceases its aid when the home owners regain their statuses (Foote, Fuhrer, Mauskopf & Willen 2). In the case of individual home owner’s plan, there are no third parties, who are the lender and servicers. The money is directly paid to the mortgage servicers. This in turn ensures that the money reaches the required party without the deductions of the third-party, and is also good for the securitized loans (Foote, Fuhrer, Mauskopf & Willen 2). The economic plan is aimed at saving the financial institutions loan repayment default by the home owners. They therefore tend to give securitized loans. The problem is that there are second line co-operations or third-parties involved, which increases the price of mortgages to be paid (Weiss & Larson 1). The two plans are in place to recover the losses incurred in mortgaging and try to protect the taxpayer and the accounts of small and medium-sized businesses. The approaches are different but the goals are similar. The economic bailout plan for Wall Street is focusing on returning the economy to its previous state as a whole, working from the institutions down to the home owners. On the other hand, the individual home owner’s bailout plan focuses on the individual, but still at the end, help in boosting of the economy. Works Cited Bianco, Katalina, & Pachkowski John. The Economic bailout: An analysis of the Economic emergency stabilization Act, 2008. Web. January 17, 2013. http://www.cch.com/press/news/CCHWhitePaper_Bailout.pdf. Foote, Chris, Fuhrer, Jeff, Mauskopf, Eileen, & Willen Paul. A Proposal to help distressed Homeowners: A government payment-sharing plan, 2009. Web. January 17, 2013. http://www.bos.frb.org/economic/ppb/index.htm. Miron, Jeffrey. “Bailout or Bankruptcy.” Cato Journal 29 (2009): 1-14. http://www.cato.org/sites/cato.org/files/serials/files/cato-journal/2009/1/cj29n1-1.pdf. National Republican Congressional Committee. Financial crisis, bailouts and Financial Reforms, 2012. Web. January 17, 2013. http://www.nrcc.org/default/Issues2012/2012_Issues_Book_Chapter_Financial_Crisis_B ailouts_and_Financial_Reforms.pdf. Weiss, Martin, & Larson Michael. Proposed $700 billion bailout is Too little Too Late to end the debt crisis; Too much, Too soon for the U.S bond market, 2009. Web. January 17, 2013. http://www.moneyandmarkets.com/files/documents/Final-Bailout-White-Paper.pdf. Read More