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Dave Ramsey’s Plan to Fix the Credit Crisis

By JLP | October 1, 2008

Jesse over at You Need a Budget sent me an email this evening asking my opinion of Dave Ramsey’s 3-step plan for fixing the credit crisis. Here’s the plan (which you can also download as a PDF here):

Years of bad decisions and stupid mistakes have created an economic nightmare in this country, but $700 billion in new debt is not the answer. As a tax-paying American citizen, I will not support any congressperson who votes to implement such a policy. Instead, I submit the following three steps:

Common Sense Plan.

I. INSURANCE

A. Insure the subprime bonds/mortgages with an underlying FHA-type insurance. Government-insured and backed loans would have an instant market all over the world, creating immediate and needed liquidity.

B. In order for a company to accept the government-backed insurance, they must do two things:

1. Rewrite any mortgage that is more than three months delinquent to a 6% fixed-rate mortgage.

a. Roll all back payments with no late fees or legal costs into the balance. This brings homeowners current and allows them a chance to keep their homes.

b. Cancel all prepayment penalties to encourage refinancing or the sale of the property to pay off the bad loan. In the event of foreclosure or short sale, the borrower will not be held liable for any deficit balance. FHA does this now, and that encourages mortgage companies to go the extra mile while working with the borrower—again limiting foreclosures and ruined lives.

2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs and executive team members as long as the company holds these government-insured bonds/mortgages. This keeps underperforming executives from being paid when they don’t do their jobs.

C. This backstop will cost less than $50 billion—a small fraction of the current proposal.

II. MARK TO MARKET

A. Remove mark to market accounting rules for two years on only subprime Tier III bonds/mortgages. This keeps companies from being forced to artificially mark down bonds/mortgages below the value of the underlying mortgages and real estate.

B. This move creates patience in the market and has an immediate stabilizing effect on failing and ailing banks—and it costs the taxpayer nothing.

III. CAPITAL GAINS TAX

A. Remove the capital gains tax completely. Investors will flood the real estate and stock market in search of tax-free profits, creating tremendous—and immediate—liquidity in the markets. Again, this costs the taxpayer nothing.

B. This move will be seen as a lightning rod politically because many will say it is helping the rich. The truth is the rich will benefit, but it will be their money that stimulates the economy. This will enable all Americans to have more stable jobs and retirement investments that go up instead of down. This is not a time for envy, and it’s not a time for politics. It’s time for all of us, as Americans, to
stand up, speak out, and fix this mess.

I think think this plan makes sense. Still, even under this plan we’re still going to see a lot of foreclosures. Those who purchased homes using interest-only mortgages and then only paid the interest-portion of the payment will never be able to afford a regular mortgage payment.

Dave’s also not quite clear on how we pay for the insurance program. Is this something paid for with tax dollars or is it something charged to the homeowner? I’m assuming it is taxpayer-funded. Regardless, I think this is a lot more tolerable than the massive $700 billion bailout that’s being discussed. What do you think?

If you like Dave’s plan, go check out his website to learn how you can help spread the word.

Topics: Dave Ramsey, Housing Market, Miscellaneous | 32 Comments »


32 Responses to “Dave Ramsey’s Plan to Fix the Credit Crisis”

  1. Miranda Says:
    October 1st, 2008 at 7:01 am

    I actually like this. It does help the “little” people by forcing refinancing of mortgages, and it also means that fewer foreclosures will ensue. I’m not sure I agree with completely getting rid of the capital gains tax, but lowering it might work. I also think that maybe they could raise the allowable limit to contributions to the Roth IRA. If it was, say $10,000 then it would encourage a great deal of investment in a vehicle that is tax-advantaged and will promote long-term prosperity and stability.

  2. Bill Says:
    October 1st, 2008 at 7:01 am

    Sounds like a reasonable plan. Too bad the dolts in Congress won’t consider it.

  3. RJ Says:
    October 1st, 2008 at 7:08 am

    Does anyone know (or is there even any way to guess) what the default rate would be if we converted all the previous sub-prime loans into 6% fixed rate mortgages? Seems like an awful lot of people couldn’t handle that kind of payment in the first place, which is what contributed to all the wild mortgage types. AIG failed because it insured mortgages and all the CDOs, now we are just going to have the government do it? Seems like we don’t have any real way to tell what we’re actually going on the hook for. And worse, depending on the terms of the insurance, it may be preferable to let the underlying debt fail and just take the insurance money.

    It seems to me that we’ve still got a huge underlying problem in that there are a lot of people that quite simply have too much house to afford, courtesy of stated-income loans, no-principle loans, easy-entry ARMS, etc. I’m not enough of an economist to know whether it’s better to shake all that out in a year or if it’s better to let it drag on for a few more years. But from where I stand, we realistically shouldn’t be trying to prevent defaults on mortgages where they owe 10 times their annual salary. You’re basically either creating taxpayer-funded housing (in the least fair way possible) or you’re just punting the issue of mortgage defaults down the road a bit. If punting the issue is truly the only thing that’ll keep the economy from collapsing, then I guess we do that. But I want someone respectable (short supply) to explain how THIS won’t be like Social Security and turn into a vast scheme that we’ll never dig out of.

  4. Andy Says:
    October 1st, 2008 at 7:38 am

    Interestingly enough, changing the capital gains tax in the past has not produced effects like Ramsey would like. For example, after the LTCG rate was lowered significantly to the current level, we didn’t really see any significant change in equity investments.

  5. Tim Says:
    October 1st, 2008 at 7:38 am

    let’s help the little people stay in homes that they couldn’t afford to begin with. Do I get to get the low fixed rate mortgages too, because I was good, or do you have to be bad in order to get the good rate? Oh yeah, I completely forgot about the $300b homeowner bailout that being bad benefited from. So let’s guarantee mortgages that people are going to default on anyways, because they couldn’t afford fixed rate mortgages from the start, that’s why they took on subprime, arm, alt-a, option arm, interest only mortgages to begin with. does that make any sense? So, the only $50b scenario is completely ficticious, because the govt backed mortgage proposal will invariably return us to where we were from the beginning, although it will cost far more than $700b in the future.

    um, where does the money come from to guarantee the insurance? oh, that’s right, call it whatever you want, but don’t call it a $700b bailout. If we don’t want to rescue the economy, then why the hell should we be rescuing people who couldn’t afford their mortgages in the first place? Let them lose their homes and rent.

    you know who has the best golden parachute? Congress. pension and medical coverage for life even after only serving one term. It’s pretty hypocritical of congress to be limiting golden parachutes of private companies when they themsleves have automatic max pay raises if they are too lazy to agree or vote on it every year and who have pensions and medical coverages for life. oh, yeah, the tax payer pays for that golden parachute. at least the golden parachute for wall street came out of the companies’ bottom line, and even if a bailout/rescue, it would still come out of the companies’ bottom line.

    ok, so we want to lift mark to market which was erected in reaction to the likes of ENRON and WORLDCOM so companies wouldn’t make up numbers. so on one hand we have big bad wall street who we don’t trust, and because we didn’t trust them after the likes of enron and worldcom, we want to trust them by lifting mark to market to evaluate their own securities? we are in a world of hurt now because people evaluated their own numbers on mortgaged backed securities, so the solution to the problem is to allow people to not mark to market? anyone else see a problem with this?

    i hate capital gains tax like the next person, but the fact is 95% of taxes come from 5% of the people. lifting the capital gains means how the hell are we going to fund anything in this country. oh that’s right, no $700b, but why not give up nearly $1trillion in capital gains revenue? does that makes sense?

    the taxpaying american has a huge hand in the current mess: negative to zero savings rate, over extension of personal credit, and more importantly taking out mortgages that they couldn’t afford. so why should the taxpayer start paying for his/her actions? oh that’s right, wall street is to blame. bad wall street.

  6. Mr. ToughMoneyLove Says:
    October 1st, 2008 at 7:54 am

    Removing the capital gains tax is a political non-starter. Congress would never consider it. In fact, Charlie Rangel has different ideas.

  7. franky Says:
    October 1st, 2008 at 9:21 am

    Removing the mark-to-market rule is completely useless and would not have the effect listed above.

  8. Scott Says:
    October 1st, 2008 at 9:25 am

    Sounds like Ramsey has been listening to Newt the last 2 weeks.

  9. philip Says:
    October 1st, 2008 at 9:39 am

    Tim has many valid points. This plan has way too many holes and no limits on what is happening to some of the money. I think it would end up costing more than this $700b that might make returns on itself in the future.

  10. Joshua Says:
    October 1st, 2008 at 9:47 am

    I hate this plan. Giving all people with bad loans a 6% interested rate? What the hell??? What about the people that did it the right way and got 30 year mortgages and paid on time all the time? I mean, I had to BUY down my interested to lower than 5.5% and your telling me they just automatically get 6%? Dave Ramsey is and always will be a financial guru for stupid people.

  11. JLP Says:
    October 1st, 2008 at 10:08 am

    Joshua,

    I think the point is that no matter what we do (as long as we do some sort of bailout), it’s going to be unfair to someone. I think it’s crazy that we even have to consider helping people but it looks like that’s where this country is headed.

  12. tom Says:
    October 1st, 2008 at 11:14 am

    I like Ross Perot’s plan better.

    http://perotcharts.com/2008/09/emergency-financial-rescue-plan/

    I don’t think re-writing mortgages will keep people in their homes. The people losing their homes chose interest only and ARM loans because the interest and payments were LOW. Having them switched to 6% fixed will still be unaffordable for many, many struggling homeowners.

  13. Money Beagle Says:
    October 1st, 2008 at 11:21 am

    The first thing I thought of is that the third point is not exactly correct. Ramsey states that eliminating the capital gains tax would not cost the taxpayers anything. In reality, this would be a net loss of tax revenue and unless there are offsetting reductions in spending (yeah, right) then this would create a bigger addition to the national debt. It’s indirect, but it’s still a cost to the taxpayers that would have to be considered. Does anybody know how much the capital gains taxes bring in each year?

  14. John T. Says:
    October 1st, 2008 at 1:04 pm

    Hopefully, this information is being sent for consideration to the congressional representatives that are going to decide a plan to help the situation…..

  15. JT Says:
    October 1st, 2008 at 2:17 pm

    Eliminating the capital gains tax is just more trickle down economics the Conservatives have been shoving down our throats since Regan was president. It doesn’t work. The only reason they like it is that it saves the wealthy on taxes and creates deficits which will give them excuses to eliminate Social Security, Medicare and any other program that they don’t need to survive.

  16. Sam Says:
    October 1st, 2008 at 2:42 pm

    JT, Isn’t the $700 billion bailout bill a gigantic trickle down program? Give the banks and Fannie/Freddie $700 billion and hope that it helps everyone else?

    Interesting the cynicism and fatalism in most of the comments. Given the situation, that is certainly understandable. When talking about
    Congress, cynicism and fatalism is generally the best route.

  17. Mary@SimplyForties Says:
    October 1st, 2008 at 3:27 pm

    I imagine there would be a lot of deserved flack regarding giving defaulters an automatic 6% mortgage. All of us who have never missed a payment and have mortgages higher than 6% might be a tiny bit upset if that came to pass!

  18. Michael Bailey Says:
    October 1st, 2008 at 3:32 pm

    Where I live, there is something like a %70 foreclosure rate. I have delivered various goods to the neighborhoods springing up in the Phoenix Metro area for over 10 years.

    For most of that time, we have been noticing a very low(and decreasing) occupancy rate in these new neighborhoods. Several of them were built on acreage actually seized from us and other ranchers along the Gila River by the City of Phoenix(while it operated in a budget deficit).

    They paid only 20,000/acre at the height of the boom, then sold it to Maricopa County for 300K per acre. Most of these properties were operating farms and ranches, and were havens for migratory waterfowl and other wildlife.

    They are now nothing but housing, and a big hole about 3 miles long for catch basin drainage. It is bare dirt covered with huge boulders.

    The phone books or welcome baskets etc. I’ve delivered have sometimes still been sitting where I put them, as much as 18 months later. No drapes in the windows, no tire tracks in the driveways, no kids’ bikes in the front yard.

    These are not the poor, who share their own blame for this mess, along with outfits like ACORN. These homes I am talking about are the people trying to flip houses on an unsupportable price climb.

    Does anybody on The Hill get that? The ones who can’t afford these houses are these flipping freaks. Many people in this area are stuck with 4 or 5 houses, when they can barely pay for the one they actually live in.

    I think the percentage of poor who actually got homes they can’t afford is lower than many suspect. It IS a substantial number, however. I pay my bills, always have, invest in savings and real property, not paper that is SOMEHOW tied to real property.

    I didn’t buy a house, because I can’t afford it. I don’t buy new cars, because I can’t afford them. We only make around 120K a year, and we’ve got no business buying any of those things, if we want to retire. We put everything we made, every bit of it, into getting our property paid off as quickly as possible. I convert pre-80s cars to CNG and alcohol, and install solar electric power for existing homes, to augment the ranch income.

    I can use my credit card anytime I want. It has actual money in the credit union to back it up.

    But that’s not real “credit”.

    I know for a fact, that I can go to any other farm or ranch in my immediate area, and after a lifetime here, I can buy any one of them, with just a handshake.

    THAT’s credit.

    I WELCOME a “Great Depression”. It would be our generation’s World War Two, the great challenge faced and met, rather than passing it on down to my grandchildren, AGAIN.

    There is every kind of social safety net for the poor in place nowadays, none of which was in place for the ’29 crash. People will be fine.

    Nation of whiners…
    -mike

  19. Lord Says:
    October 1st, 2008 at 6:28 pm

    Some comments
    Are these loans to be doled out whether the borrowers can afford them or not? If they could afford them they could already refinance, if they can’t how will that solve anything?
    One can already evaluate the value of these on a discounted cash flow basis if there is no effective market. If the cash flow isn’t there, the value isn’t there either.
    What tax free profits are to be had if the intrinsic value is still below current prices? Housing prices are still beyond the incomes of those who would buy and are still declining. The game of finding the next bigger idiot is over. We ran out of them.
    This is denying reality. The economy has been running on empty since 2001 fed by mortgage equity withdrawals. Now that this has ceased we are in for a cold hard winter. It is time to give up the delusions.

  20. Jim Says:
    October 1st, 2008 at 6:41 pm

    I had the same initial reaction as Money Beagle, that suspending capital gains taxes would cost us lost tax revenue. I also fail to see how it will help the situation. Capital gains tax receipts in 2005 were $75 billion.

    Mike, “Where I live, there is something like a %70 foreclosure rate. .. Phoenix Metro”.

    There may be small areas or neighborhoods where most homes are under foreclosure. But no large city or area has anywhere near a 70% foreclosure rate. In July Arizona was 3rd highest foreclosure rate in the country with 1 in 70 homes under foreclosure. Thats about 1.4% For Phoenix it was 1 in 51 homes or almost 2%. The very worst city is Stockton CA with a 1 in 25 foreclosure rate or 4%.

    Jim

  21. Jon Says:
    October 1st, 2008 at 9:47 pm

    Insurance is great, but what are we insuring? One of the big problems here is that nobody knows the value of the securities. What is the cost of the insurance? Really, this is hardly different from the existing bailout package. Loans that go bad will be paid by the government insurance program, as opposed to the government buying loans that are bad and paying above market value. Okay… thanks for the brave new plan! What a bold new direction! And check out this gem: “This backstop will cost less than $50 billion—a small fraction of the current proposal.” Where on Earth did he come up with that number?

    Also, doesn’t the second point about suspending mark to market rules contradict the first point about insurance? If the insurance program is designed to give people more faith in the securities because they’re guaranteed, then why would the market price of the securities still be “artificially” low? Either the insurance works and we don’t need to suspend mark to market, or the insurance fails and we don’t need to implement that part at all. One or the other.

  22. Paul Says:
    October 1st, 2008 at 10:53 pm

    Thank goodness others see through the “Common Sense” solution. Not only is it absurd to think that subprime borrowers could handle a fixed payment at 6%, but we’re going to roll back late charges/payments into the loan amount so borrower can be even more underwater!

    I think Dave should keep making raking in money teaching the financially challenged.

  23. BizBlogged Says:
    October 2nd, 2008 at 1:16 am

    Great idea, when it comes to implementation i don’t know what will be the output.We hope for the better idea from you.

    Finance blog, finance, economics, Corporate finance, Personal finance, Investing, Marketing

  24. Until Debt Do US Part Says:
    October 2nd, 2008 at 6:07 am

    Good Plan and it makes sense but trying to get the vested interests behind it would be a nightmare. The power to create real change is concentrated in the hands of too few people and I don’t think that they would buy into this.

    There is a fixation on the bailout being the cure all. It won’t – in fact the medicine could be worse than the illness.

  25. kitty Says:
    October 2nd, 2008 at 12:21 pm

    “I WELCOME a “Great Depression”. It would be our generation’s World War Two, the great challenge faced and met, rather than passing it on down to my grandchildren, AGAIN.”

    I don’t think you know what you wish for. Are your money all in gold coins under the mattress? Do you realize that after the crash of 1929 it took till 1954 for the market to rich the same level. Would your 401K handle it? How about your job? Do you realize that it took until World War Two for the economy to show signs of life. Not to mention that World War Two mightn’t have happened if not for the Great Depression, but I guess you don’t give a damn about millions dead if you can welcome it. Yours is such callous message, it’s just difficult to fathom that somebody can think like this. There’ll be a whole generation of young people who cannot get education because they cannot get loans; there’ll be older people who’d lose their life savings… But I guess you believe it wouldn’t affect you, and you are willing to sacrifice others so they follow your ideals, right?

    “There is every kind of social safety net for the poor in place nowadays, none of which was in place for the ‘29 crash. People will be fine.”
    And where would the money for this safety net come from? You got it – the government i.e. taxes. But with fewer people employed, fewer people pay taxes i.e. bigger government debt or printing more money. This would cost a whole lot more in tax dollars than any bailout. I certainly lost more than my tax share of the bailout in the last few days. What about you?

    Not to mention that the US isn’t the only country which will be affected by it. Just like the Great Depression’s effect on Germany may have contributed to Hitler’s rise to power, we don’t know what the effect of another economic disaster will have on other countries. Or would you welcome World War III as well?

    “Nation of whiners…”
    May be. But things like the Great Depression normally transform whiners into very angry people and not at all nice. Go to any third world country or even Eastern Europe and see if hardship makes people nicer.

    As to Dave Ramsey’s plan, as much as I would’ve loved to have no capital gains tax, I am not sure it would have the desired effect. In my case, it may actually prompt me to sell some stocks quicker to take advantage of it while I can. Also, while I do like some of his ideas in the plan, I don’t think it would help unfreezing credit markets quickly enough to avoid hurting businesses and municipalities. Also as people said, I am not sure that rewriting at 6% will make homes more affordable. Nor is it at all clear if Dave Ramsey’s plan will be any cheaper.

    I don’t think the bailout is cure-it-all. But getting rid of some of these assets may rid the banks of some uncertainty that caused them to be afraid to loan money to one another. Also, raising insurance limit to 250K may stop runs on banks which in face of freeze in interbank loans may cause even better banks to collapse.

    BTW – while there is debate in bailout, we’ve lost 1.2 trillion in the stock market the other day.

  26. kitty Says:
    October 2nd, 2008 at 12:27 pm

    “What tax free profits are to be had if the intrinsic value is still below current prices? Housing prices are still beyond the incomes of those who would buy and are still declining.”

    We don’t really know what the intrinsic value is. The current market value is based on panic, so the assets may very well be priced with assumptions of much higher default risk and lower recovery in case of foreclosures. I heard on CNBC – and yes, it is only one analyst’s opinion – that these assets are valued as if the foreclosure rate is 50% and there is no recovery at all i.e. if foreclosed houses are sold for $0. In reality the foreclosure rate is about 25% and there is some recovery.

    The question is how the government will price them. If they are priced at current market value, there’ll be no help to banks. If they are priced at 100% of original mortgage values, the government will lose. But it is possible to find some amount e.g. 50 cents on a dollar or whatever that would both help the banks and give government a chance to make money in the long run, or at least recover most of the money.

  27. Renter Says:
    October 2nd, 2008 at 12:42 pm

    Super plan. Bailing out people who either couldn’t afford a home in the first place or bought more than they could reasonably afford is a great way to encourage moral hazard. And yes, let them keep their homes (on my tax dollar) rather than return to the renters market with the rest of us. After all its silly people like me who demonstrated judgement by avoiding a mortgage we couldn’t afford who will pick up the tab for this mess EITHER WAY AND WITH NO PERSONAL BENEFIT.

    If I can’t pay my rent for a few months I don’t get a pass, I don’t get my rent reduced and I certainly don’t get forgiven a single dime I am delinquent. What I get is EVICTED.

    So why should I(and other taxpayers who were smart enought to know that we were priced out of the housing market) step in a bail out “homeowners” who’ve been collecting tax credits and deductions on their homes for years now when I have recieved zilch in similar tax relief? It hardly seems equitable.

  28. Ben Says:
    October 2nd, 2008 at 4:03 pm

    Good for Dave for getting his ideas out there. I personally think they have a few holes, but this is our collective problem, so we should be coming together in dialog to solve it.

    How do you legislate against human nature. that is the real underlying problem. Emotional reactions to fear and greed and social proof cause these bubbles every 20 years like clockwork.

  29. Tim Says:
    October 2nd, 2008 at 6:43 pm

    the problem with fixing everyone’s rates at 6% is the fact that if they could have afforded a fixed rate mortgage to begin with, they wouldn’t have taken out interest only, alt-a, arm, option arm, and interest only mortgages. this is the biggest hole in the argument of bailing out homeowners. If they couldn’t afford to begin with, how the hell are they going to afford now? They aren’t. the mortgages are still going into foreclosure, which means we are still delaying the inevitable in terms of foreclosures. The additionally big problem is that we will delay facing the foreclosure for a year or two and then we have another series of 5 year arms that are going to reset. i understand that people are trying to spread out the foreclosures over time rather than having them happen all at once, but let’s be real and understand that we are not keeping people in homes in the end. they simply can’t afford it, that is unless somehow we reset the value of their homes to 2004 and reset the mortgage to that value. man i wish i was stupid and got into an unaffordable mortgage. i’m an idiot, i just wish i had the foresight.

  30. JT Says:
    October 6th, 2008 at 7:07 am

    To Sam

    The difference with the bailout is that the money going to the banks will allow them to lend money again directly to busineses, people buying cars, students and many others. With the trickle down economics, the wealthy get all the benefits, and supposidly will invest the money, which will expand buisness and create more jobs. All it has created is a wider gap between the rich and everyone else.

  31. cm Says:
    October 8th, 2008 at 3:26 pm

    I am so fed up with this wining about helping people with a flat interest rate. Some people could stay in their houses if the bamks would work with them. There are alot of people who bought houses and got screwed by the mortgage brokers who offered “less paperwork loans” to people just because it was easier for them to close the deals with the banks. The banks knew they where giving loans to people that were questionable. That does not mean everyone that got a loan was a dead beat. We bought a house with higher than normal rates but we could still afford to make the payments. Then we had medical issues and got behind. Now our credit is screwed and we call the bank to work out a refinance or to get help with our payments and they tell us to take a flying leap. So I say screw them and they can eat the cost of foreclosure because I want to keep my house and they dont want to help work on that. I say let the whole economy crash so all the people who say “I paid my bills so screw anyone that needs help” can see just how everyone is connected. May they never have any troubles that they have to struggle through and GOD forbid they ever need any help.

  32. KM Says:
    October 9th, 2008 at 1:27 am

    If we don’t do something to help people save their homes, it will hurt all homeowners. The market is already glutted with foreclosures and adding more won’t help anyone.

Comments