Banking Crisis - The 1% Solution

Dear Mr. President,

I believe there is a far simple solution to the banking crisis that will simultaneously save the banks, spur savings, spending and restore confidence to the American People. You can call it the 1% Solution.

Many banks are stuck in good quality mortgage paper like mine selling at 60 cents on the dollar. They will stay stuck UNTIL they can be refinanced and paid off at 100 cents on the dollar. When those mortgages get paid off, the banks will get capital back for lending, pay off their TARP borrowings and more importantly, they will have WRITE UPS instead of write downs as they adjust their bond portfolios. In addition, the mortgage pools will devolve and the good bonds will separate from the bad bonds.

The question is: "How do you get people to refinance their mortgages?"
The answer: Buy down their rate by 1% if they refinance in the next 12 months and make the buy down effective for 5 years.

With rates at 5.0%, you would see an avalanche of refinancing if people knew they could get 4.0% for 5 years. The refinancing would force the Mortgage Backed Bonds that banks hold to come due at 100% of face value. Bank would then have WRITE UPs on their assets, bank capital would replenish, savings would increase, economic activity would increase, and confidence would come back to the financial system and the American people.

Sincerely,

David Cross