Bill Gross' Big Idea

Bill Gross, the "Warren Buffett of Bonds", is in the news this week. He has a radical idea to help "Main Street" and boost the economy.

In short, the tremendously successful billionaire, who runs what is the largest and, arguably, the best mutual fund in the country, wants Fannie Mae and Freddie Mac to lower the interest rates on all mortgages they hold now. Significantly. Like 6% loans would go down to 4%.

This would massively reduce the monthly payment obligations of the borrowers while still requiring they pay-back all of what they borrowed.

This would not require lenders to write-down the value of assets, either. They'd have to suck it up and plan on 1/3 less income, though.

Let me know what you think.

Newsflash: It Was Not Just "Sub-Prime"

It never was, but it was easy for pundits, and more convenient for politicians, to say it was.

Saying it's just the "sub-prime" borrowers that are defaulting allows Left-wingers to manufacture a victim in this mess, and it enables Right-wingers to blame it on the less-able or more lazy among us.

But get this: one in seven mortgages over $1mm is "seriously delinquent", while only one in 12 mortgages below $1mm fit that bill.

You read that right. The more affluent borrowers are almost twice as likely to be up a creek on their mortgages than everyone else.

From a "what the heck were the banks thinking" standpoint, Sub-Prime is a much larger share of this mess, and so that issue is not to be ignored. But what does it say about the direction and mindset of our country when the more successful among us are more likely than the masses to do the wrong thing with their financial lives?

Troubling Signs: The No-Go Re-Fi

More signs pointing to economic trouble ahead... A client was rejected, flat-out, this week in two attempts to re-finance the mortgage on an investment property. Surprised? No. But this is not good news.

In short, the condo he bought as a bachelor is now an investment property he rents-out. It pays for itself, and then some, from rental income. It is also worth about twice what he owes on it. His credit rating is top-shelf, and his wife's is even better. They make enough money to do all the things they do, and they carry no debts other than their mortgages.

Nonetheless, he was rejected. The superstar mortgage broker he went to, who is one of the best salesmen you'll meet and a great guy, looked at his situation and said, "no dice." Then he went to Morgan Stanley Credit Corp, where the mortgage is right now. No dice--"we don't do any investment condos right now".

Folks, under Bush, and now Obama, Bernanke's Fed and Paulson's/Geithner's Treasury have flooded our economy with liquidity to get it going again. It comes in the form of actual money being sent out of government coffers, in the form of absolute rock-bottom interest rates, and in the form of regulatory adjustments. The intention is to spur the economy in the right direction.

It may well have prevented a Great Depression II so far, but it's not working beyond that. If this guy's own lender won't let him re-fi a loan that has a spotless record when he's in better financial condition than at the outset of the loan years ago, and when--get this--he was basically offering to pay them MORE money, something is not working. That's right, he wants to re-fi out of a 30-year loan and into a 15- or 20-year loan that would give them a higher interest payment from him each month. Since most mortgages don't last more than 5-10 years, it's arguably irrelevant that they'd normally rather have him for 30 years than for 15 years.

My point? Drop your politics and look at the reality on the ground. Whatever "They" have been doing so far is just not working. The economic activity in this country depends greatly on confidence and credit. When banks won't even make solid bets on existing customers who are willing and able to pay more, we're not yet back on track.