Here Are My Terms

Mortgage modification legislation is currently moving through Congress; the bill allows bankruptcy judges to reduce the principal as well as the interest rate on an outstanding loan.

Consider the case of a homeowner who, after their home purchase, experienced an initial strong upturn in the value of their house. Flush with equity and assured by experts that the value of their home would go up forever, they took out a home equity loan and spent the proceeds on clothing, jewelry, vacations and a new SUV. Now that housing values have gone south, they file for bankruptcy; and a judge reduces the principal on their home loan. What has been consumed already, via the equity loan, the homeowner keeps.

The rest of us pay the bill. Would you want to be a lender when these are the rules? To compensate for increased risk to lenders, interest rates of all kinds will go up; indeed the market for some types of loans may dry up completely. No matter, Congress will pass another fix for that.

Most importantly, a prime principle that built America—namely, that we honor the contracts we sign—will turned into a national game of how we can avoid honoring our contracts. As more people play that game, our principles will erode and the economic depression will deepen; we will all pay the price.

Since Congress and the President seem determined to do everything in their power to turn us into a third world country, let’s learn from a country like Bangladesh.

Dr. Muhammad Yunus is a Nobel laureate from Bangladesh. Dr. Yunus’s great genius was to figure out a system that would allow for poor but entrepreneurial minded Bangladeshis to borrow money and start a business. These loans are not collateralized; yet, over 98% of the time, these loans are paid back in full. How? Each applicant has to form a team with four other applicants, and they each have to cosign for each other’s debt. Given that, you can be sure that business plans are carefully scrutinized by the cosigners.

If Congress passes the proposed mortgage modification measure, I suggest we borrow a page from Dr. Yunus. I propose there be no reduction in principal until a household budget is submitted to and approved by four cosigners. That’s right, the cosigners would be on the hook if the homeowner defaulted again. Cosigners might consider imposing these terms to minimize the chances of a default:

  1. No loan modifications granted for homes which are above 1500 sq. ft. If your home is larger, you need to downsize first.
  2. No occupant of the home can own or lease a car valued above $10,000.
  3. No occupant can own flat-screen televisions or subscribe to cable television.
  4. No occupant can take a vacation away from their home.
  5. No one can eat out.
  6. No purchases of processed food would be permitted. This reduces the family’s food budget. It also lessens the chance of an illness which could interfere with paying back the loan.
  7. Non-food purchases above $100 would have to be approved by the cosigners.

Pretty draconian? Very few would apply? That’s the idea. And yes, I would apply the same terms to everyone in Congress who votes for the mortgage modification bill. After all, they too are spending other people’s money and should be bound by the same terms.


10 Responses to Here Are My Terms

  1. Frankvv says:

    Dr. B,
    For the most part I like your strategy and clearly very few people would apply for “help” based on your terms and conditions. Although I think the flat screen TV criteria is a bit much, since the traditional picture tube is 15 minutes from being extinct. 
    At any rate, we as a society have some how became one that believes that the world owes us something. And if we don’t like the direction things are going in, we change the rules to suite us. That includes placing the blame on others for our own poor decisions. We believe in free markets when things are going well and want a minimum amount of rules and regulations, but when things go south, all of a sudden there is a great cry for more government controls and handouts. Not only do we want our cake and the ability to eat it, but we want that supply of cake to be endless. Accountability must start with each of us as individuals. I have no problem helping someone when they are down, but handing out free money does not teach an individual to be fiscally accountable. In order for someone to really learn from their mistakes they must truly suffer the consequences of their actions. And for those that made poor financial decisions they need to really feel the pain, and not push that pain on to others. I can’t help but think about my 3-year old granddaughter who is learning everyday by doing things that she shouldn’t. If she runs too fast and trips and falls, she will remember the pain that the fall caused and she may in turn slow down around the crash zone. The pain helps her remember not to repeat those negative actions. The people that are being handed out new money to help them recover from their poor judgment are not being given ample opportunity to feel the real pain of their poor decisions.

  2. John A Wood says:

    Dear Barry

    Really enjoyed your passionate piece.

    Although the time has come, is actually overdue, it has not quite arrived yet.

    We will see soon enought though, out of necessity, such terms being asked and accepted.




  3. Frank,

    Indeed, when we deprive others of the opportunity to learn it is neither good for them or for the economy.


    Do you mean that huge increases in Treasury interest rates or even Federal and state bankruptcies will end or force huge reductions in all of this bailout nonsense? If so I agree, such unthinkable events may be on our horizon.

  4. Paul Coastie says:

    Dear Barry,

    Almost everyday I have a brief conversation on our economy and laws being passed with my fellow coasties on our cutter (currently in the pacific). Instantly they turn into loud flaming hurting word debates. Although I don’t agree with you 100% I do agree with you on many things because I am an investor, home owner, saver, budgeter, and believing more in a small govt. more capitialistic/entrepreneur run society. My co-workers however are on the complete other end of the spectrum, true believers of big govt., military takes care of all, and no reward for people who work hard (at anything) to grow wealth and opportunity over time. I am physically and mentally screaming at my sub-ordinate co-worker at the top of my lungs. Both of us calling each other morons in front of 6 other people hiding, physically leaving the space, and in a hurry not to have to listen or join the fired up conversation.

    My friend that tells me the govt should bail out banks, banks should help people who can’t make their loans, and should not let bad businesses go into bankruptcy reads all his news off of the CNN website. He has no understanding of what its like to save, invest, and become a home owner. He has never read many economic and banking books like I have and has no interest in being an investor or entrepreneur. I’m not the best public speaker, but I’m passionate. The sad part is all the military people basically join him and agree with him. They think I’m crazy and he’s right.
    What is worse is that as mad as I get I can’t even leave the boat to take a breath of air because we are stuck at sea together. I go over in my mind how I can be in the military with people that have no understanding of finances because the military takes care of everything for them. A high majority of people in the military through out their 20 years don’t even ever buy a home even though they are given a LARGE monthly amount to buy or rent.

    It just drives me nuts Barry. When I read your blog feed time to time I sometimes think you are crazy for your ideals, but the more everyone thinks I’m a radical makes me believe your radical ideals make more and more sense from your experience in economics.

    This experience living and working with all different types of military people really makes me not want to do military as a career. Could I really withstand another 16 years of this mentality? I don’t want to become brainwashed with them, but at the same time I also know if I can not become a professional stock options trader making money independently which is what I’ve been working towards for the past 5 years then I will be forced to get another job or rejoin the military.

    The way I see the govt. and the flow of money moving towards is not good for my two home rental investments. My goal was to buy them distressed and sell for a profit. As optimistic as I am I can not deny the truth that our country as a whole isn’t getting better it is getting worse. If more people think this way the natural cycles will be broken such as:

    – home owner goes into foreclosure for any reason financially or personally
    – bank has to get it off its books
    – opportunity for an investor to buy it below market price
    – investors fixes it up and rents or lists it for a profit
    – market buyer picks it up or creates a home to rent for a renter
    – a person has a home, the bank got it off it’s books to create more loans, and the investor has either a cashflow with equity, or sold for some type of profit to move on to the next deal

    You take out the investor and the bank just lets the home owner keep the home, bad for the bank, bad for the distressed buyer because he/she didn’t learn from the mistakes made from buying it, investors gets less deals to put back into a healthy real estate market (froms ups/downs), and now this simple cycle is broken. Like you mentioned rates go up, less homes are sold, less homes are purchased, more renters, less home appreciation, more bad loans banks will be forced to hold instead of selling them as opportunity to investors, and less investors will want to invest on their own turf. Then a guy like me who buys a distressed condo doesn’t feel like it was much of a deal now because although I just put lots of work into it I may just be stuck in a cycle that only help consumers but not savers/investors. It’s really scary in my opinion. No real free markets.

    Always enjoy reading your well written journals.

    student of the market

  5. Paul Coastie says:


    Why do they need a tv when that extra time could be in a second job paying off their bills? I only mention this because if I can do it and pay off my debt so should they. Everyones abilities aren’t the same (and motivation), but their shoulds be strict standards even if they sound bullying like Barry mentions.

  6. Paul,

    The kind of debate that you describe is very exhausting for all parties and as you say no one is convinced. Samuel Butler said “He that complies against his will is of his own opinion still.”

    As the economic situation worsens, polarization will only go up. We all need to be a peaceful presence in the world both for our own sanity and to increase our ability to influence others. When your colleagues are ready they will realize for themselves there is another way to look at things and you will be able to assist.

  7. e says:

    Thomas Edison once said, “‘Vision without execution is hallucination.” Not a sermon, just an image consistent with Kellogg’s.

  8. igli1969 says:

    Paul’s comments reminded me of when I was in the Army in the mid-1970s. The mentality was pretty much the same then. One could expect this, however, if the circumstances of a military life are examined.

    For those in the military who are not married and living with their family, the military provides housing, meals, medical care, etc. In loco parentis. The regimentation of the military adds to the simulation of a (very large) family. Many members of the military thus have an emotional attachment to, and emotional dependence on, the military.

    This mindset tends, for those who have it, to predispose them towards acceptance of the thesis that the government should take care of us all, because “Father Knows Best.” And the military dictum that “no one is left behind,” which is good in a military setting (IMHO), can have negative consequences in the civilian world, in which there is no political stomach for the discipline that the military usually applies in the aftermath of a screw-up so that the same mistake is not repeated by the one who screwed up.

    Politicians cannot stay in power if they annoy too many voters, and demanding that people be held responsible for their actions is a sure way of doing that. Voters are happy if “the rich” are called onto the carpet, but don’t want that standard applied to themselves. Human nature on all sides here.

    Unfortunately, this means that the ants are required to work extra hard to support the grasshoppers.

    Chris C.

  9. Paul Coastie says:

    I’d like to note that new military pay laws are making it hard to have bigger families or accept people with families into the military. Basically the military has been paying out extra dependent money for years for each dependent. Now they are stopping it at a family of 4 or 3 dependents plus the service member. They are also paying less and drop rates for BAH-with dependents/cola/extra money ex.

    They actually pay spouces (man/woman) even more when either is gone underway/iraq which is called “seperation allowance” meaning when you are seperated the government will pay you more so you can spend your hearts desire while your husband/wife is working/dieing. You’d think the family should be spending less since the member is gone on patrol/instead the psychology is “here take even more money to spend so you don’t get depressed and forget about your love one”.

    I’m no finance wiz, but even a teenager or college student would figure military is way over paid or their should be real different pay scales. For one thing if I was going to a real war with guns and in a killing zone you’d think you’d be paid more then someone who is not in a war zone. You do receive hazardous pay, but its basically nothing.

    Military people do become very dependent on their pay. I actually know a few members who have saved up quite amount of cash but are too scared to leave. It’s quite sad to see brilliant minds go to waste over security dependency.

  10. James D. says:

    Actually, I think that Paul Coastie hits the nail on the head. When I talk to others about what’s happening in the economy, I can usually gauge their response by whether or not they are stakeholders like Paul. If someone owns a small business, works for themselves, pays their bills on time, saves money, actively invests and otherwise makes smart moves, they are much more likely to be outraged by what’s going on, since the burden will be on their backs with little benefit to them.
    But if someone is on welfare, works for a firm receiving large gov’t subsidies, owes more than their house is now worth, works for gov’t (or the military in the posts above), and generally has made poor decisions in the boom of the last decade, they are much more likely to be in favor of a bailout, since it won’t be at their expense and will likely benefit them.
    While I’m not necessarily advocating a return to the past, its easy to see why in many areas of the world (in times past), only land owners and others with significant stake (like craft guild members) could vote.

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