On Tue, 21 Aug 2007, Jordan Hayes wrote:
> Doug writes:
>
>> A more quasi-socialist variation on this: you could create a
>> public entity that would buy the defaulted mortgage at a discount,
>> collect the rent to help fund its operations, and eventually
>> turn the house into some kind of limited equity property managed
>> by the new entity.
>
> Shouldn't lender self-interest (ahem) win the day on this?
>
> An under-performing loan is way better than a non-performing one, for
> all involved.
Krugman had an interesting column on this on Friday. His point is that because of the securitization of subprime loans, the local lender doesn't have the power to do this anymore. It would take government intervention of the sort Doug describes to create someone who does.
Michael
=========
The New York Times
August 17, 2007
Op-Ed Columnist
Workouts, Not Bailouts
By PAUL KRUGMAN
In April, Henry Paulson, the Treasury secretary, declared that all the
signs he saw indicated that the housing market was at or near the
bottom. Earlier this month he was still insisting that problems caused
by the meltdown in the market for subprime mortgages were largely
contained.
But the time for denial is past.
According to data released yesterday, both housing starts and
applications for building permits have fallen to their lowest levels in
a decade, showing that home construction is still in free fall. And if
historical relationships are any guide, home prices are still way too
high. The housing slump will probably be with us for years, not months.
Meanwhile, its becoming clear that the mortgage problem is anything but
contained. For one thing, its not confined to subprime mortgages, which
are loans to people who dont satisfy the standard financial criteria.
There are also growing problems in so-called Alt-A mortgages (dont
ask), which are another 20 percent of the mortgage market. Problems are
starting to appear in prime loans, too all of which is what you would
expect given the depth of the housing slump.
Many on Wall Street are clamoring for a bailout for Fannie Mae or the
Federal Reserve or someone to step in and buy mortgage-backed
securities from troubled hedge funds. But that would be like having the
taxpayers bail out Enron or WorldCom when they went bust it would be
saving bad actors from the consequences of their misdeeds.
For it is becoming increasingly clear that the real-estate bubble of
recent years, like the stock bubble of the late 1990s, both caused and
was fed by widespread malfeasance. Rating agencies like Moodys
Investors Service, which get paid a lot of money for rating
mortgage-backed securities, seem to have played a similar role to that
played by complaisant accountants in the corporate scandals of a few
years ago. In the 90s, accountants certified dubious earning
statements; in this decade, rating agencies declared dubious
mortgage-backed securities to be highest-quality, AAA assets.
Yet our desire to avoid letting bad actors off the hook shouldnt
prevent us from doing the right thing, both morally and in economic
terms, for borrowers who were victims of the bubble.
Most of the proposals Ive seen for dealing with the problems of
subprime borrowers are of the
locking-the-barn-door-after-the-horse-is-gone variety: they would curb
abusive lending practices which would have been very useful three years
ago but they wouldnt help much now. What we need at this point is a
policy to deal with the consequences of the housing bust.
Consider a borrower who cant meet his or her mortgage payments and is
facing foreclosure. In the past, as Gretchen Morgenson recently pointed
out in The Times, the bank that made the loan would often have been
willing to offer a workout, modifying the loans terms to make it
affordable, because what the borrower was able to pay would be worth
more to the bank than its incurring the costs of foreclosure and trying
to resell the home. That would have been especially likely in the face
of a depressed housing market.
Today, however, the mortgage broker who made the loan is usually, as
Ms. Morgenson says, the first link in a financial merry-go-round. The
mortgage was bundled with others and sold to investment banks, who in
turn sliced and diced the claims to produce artificial assets that
Moodys or Standard & Poors were willing to classify as AAA. And the
result is that theres nobody to deal with.
This looks to me like a clear case for government intervention: theres
a serious market failure, and fixing that failure could greatly help
thousands, maybe hundreds of thousands, of Americans. The federal
government shouldnt be providing bailouts, but it should be helping to
arrange workouts.
And weve done this sort of thing before for third-world countries, not
for U.S. citizens. The Latin American debt crisis of the 1980s was
brought to an end by so-called Brady deals, in which creditors were
corralled into reducing the countries debt burdens to manageable
levels. Both the debtors, who escaped the shadow of default, and the
creditors, who got most of their money, benefited.
The mechanics of a domestic version would need a lot of work, from
lawyers as well as financial experts. My guess is that it would involve
federal agencies buying mortgages not the securities conjured up from
these mortgages, but the original loans at a steep discount, then
renegotiating the terms. But Im happy to listen to better ideas.
The point, however, is that doing nothing isnt the only alternative to
letting the parties who got us into this mess off the hook. Say no to
bailouts but lets help borrowers work things out.