What if we gave incentives to people NOT to default on their loans?  What if there were principal reduction programs or rate-cut programs, but those were available only to those with a clean mortgage history (for at least, say, one year)?  How many people are paying credit card bills, but stiffing their mortgage company?  Think that would happen if your interest rate declined by .5% every year you were clean?  Or if you had $5000 of your principal balance forgiven for every 2 clean years?

And it seemed that nobody was listening, but now that is changing.  Obviously nobody is going to listen to me, but perhaps someone important can get the attention of the powers-that-be.  Last week Paul Jackson, the editor of HousingWire Magazine, called for a principal-forgiveness program for those that are NOT behind on their mortgages.  Here’s a salient paragraph:

Imagine if the current group of performing-yet-underwater borrowers — effectively more than 14 million strong, or roughly three times the annual estimate for all mortgage market activity — were actually able to sell or refinance their home. Talk about introducing legitimate demand into a market quite literally starved for it. It’d be instant stimulus. It’d be the right kind of stimulus. And we’d not be hearing about a housing depression any further, either, as homes started to really move.

This likely means it won’t happen, of course, but it is nice to know I’m not the only one that can see how good a thing it would be.

Read that post.  Then scroll down and read the one below, which is a fantastic description of why I you we have too much stuff and I you we should really get rid of a lot of it.

Not too surprisingly, since the poll is being held on an advertising website, the response is running heavily in favor of “yes”.  But even if it weren’t, I think that would be the general mood.  Every talking head, most everyone you meet, thinks the economy is going into in the tank, and thinks that it is going into in the tank because the consumer is not spending enough money.

Part of that is true.  Part of it is not.  Let’s use an analogy.

My sister runs half-marathons.  Or, at least, she ran a half-marathon last week, so for me, that means she runs them.  She can run a long, long time, but she cannot run forever.  Eventually, she has to stop.  Now, I guess it’s true that she doesn’t HAVE to stop, at least not right there at the finish line.  She could keep running for a bit.  But sooner rather than later she’ll find that she’s running on borrowed reserves, that she needs to re-tool and rest and get food back in her, or she really will have to stop altogether.

TADAAAAA!  Same thing is happening here.  For a long time, the economy has been running on credit, that is, people are spending money they don’t have yet, hoping that the future will bring sufficient funds to pay back what they are spending now.  Now, if you are the only one doing that, it’s a problem but not a desperate one.  When everyone does it, however, there’s potential for a catastrophe.  Essentially, much of what everyone has been paid over the last thirty years was borrowed.  Now the bill is due, or, more accurately, the bills have been mounting steadily and they have now reached the point where the bill is larger than the income.

What smart people do when this happens is they look at the bills they have to pay, and they start cutting.  Nordstrom becomes Nordstrom Rack becomes Ross becomes the Salvation Army.  Market Street Grill becomes Outback becomes McDonalds, becomes “ah, I’ll have a piece of toast and go to bed”.  Vacation in France becomes the Grand Canyon becomes two days skiing becomes a Netflix disk of 24, the Second Season.  Etc.  Driving gets reduced, spending slows, people get defensive.  Now, I’ve written a lot about saving and what I call Financial Defense, and obviously really smart people play defense all the time, not just when things get tough.  But when they do, everyone starts playing defense.  This is terrible news for big chunks of the economy.

If you’re in luxury items, you’re in trouble.  You might survive (there are good ways to do that, but that’s not for this post), but you’re going to have to watch it.  If your business model depends on people paying $7 for a scoop of ice cream, you might have difficulties coming.  If you depend on true, non-food luxury sales, like for instance high-end art, you’re dead.  You will, absolutely, have to change what you sell, at least for a while.  In every recession, there are dead bodies, and if you think most of the dead bodies are going to be on Wall Street, you’re nuts.  Most of them will be on your street.  Businesses will have lower revenue, which means they have to cut something, and that something is you.

Less money coming in means you have less to spend.  It’s a very tight circle.  This is the cycle we’re in right now.  There is a way out, but it is NOT the way out that is currently being considered on Ad Age, or, in fact, anywhere else that I can find.  The solution to the decline in consumer spending is NOT throwing hundreds of billions of dollars at people in the hope that they will spend it (Stimulus I).  It is NOT throwing hundreds of billions at banks, hoping they will lend it (Stimulus II) – because PEOPLE DON’T NEED TO BORROW MORE MONEY RIGHT NOW.

What they need to do is LESS borrowing and more retirement of debt.  They need to get out of debt altogether.  Believe me, if the lending in the US vanished, and the debt in the US went with it, spending would skyrocket.  Who doesn’t want to spend money once they have no debt to worry about?  Seriously now, if you were in a position where you had no debt at all, no house payment, no car payment, no debt payments at all, how fancy would you eat out?  How many more movies would you see?  I you’re like most households, elimination of your debt would close to octuple (that’s 8x) your spendable cash.  Forget shopping sales.  You could go to any store, any time, and buy whatever you wanted (within reason).  Retirement saving becomes really, really easy if you don’t owe anything but the light bill and property tax.  Every part of the economy would benefit, and would do so in a sustainable way – to go back to our analogy, my sister would then be able to run forever, faster and faster.  No breaks.  Endless energy.

THAT is how we get out of the trouble we’re in.  Unfortunately, to do that we need two things we haven’t got – discipline, and patience.  So it isn’t going to happen.  What we’re going to get instead (on the macro level) is a fellow coming to the end of the marathon with a cattle prod and goosing the runners to keep going long past the point where they have strength.  What we’re going to get is people running past the finish line as if they have unlimited strength, and can borrow forever.  Both of these things lead to disaster.

So whatever others do, don’t you be stupid.  Refuse to be goosed.  Save your money, and save faster by getting rid of your debt. All of it.  Yes, even your mortgage.  Just say no.  Cut.  Save.  Whatever happens in the general economy, you be smart.

Restrictions (up to the moment):

a. has to be a 30-year, fixed-rate loan

b. borrower can’t make more than $75,000 a year ($150,000 for married couples)

c. house cannot ever have been lived in at all, even by renters

d. loan has to be fully approved and ready to close before application for the grant is made

But that’s it. Utah Housing Corporation will administer what is being called the Home Run Grant. The money is wired directly to the title company. It doesn’t block you getting the $8000 tax credit from the Feds, either. There are 1600 of these available.

Or, more accurately, there will be 1600 of these available if the House approves it in time. Today is the last day of the session for the Utah Legislature, and it will all be over by midnight. I’ll keep you posted.

In the short run, there is nothing – not one thing – in this bill that will make a significant impact to anyone that doesn’t work for the government, or have the government as its chief source of revenue.  The markets noticed.

The Senate version of the bill had an increase in the credit to $15,000, made it for ALL homebuyers, and removed the payback provision of the original.  The conference committtee, however, has downsized that credit to $8000, rolled it back to just first-time homebuyers, and protected only the 2009 January to August purchasers from repaying.  If you bought last year, in other words, you get another $500 but you still have to pay the credit back over 15 years.

Personally, I hate it when Congress does most anything, but this back-and-forth, you get the credit but you don’t silliness is not going to help the markets at all.

The credit is targeted at the wrong people, timed incorrectly, is a tax-accounting nightmare and overall one of the stupidest non-ideas I can remember.  And I like tax credits.

More here.