A couple of weeks ago, Jordan posted his plan for how to fix the housing crisis for good:
http://mailman.lbo-talk.org/pipermail/lbo-talk/Week-of-Mon-20090216/002441.html
It ignited almost no discussion. I think that might have been in part because it was so concise and technical that most of us didn't get it on first skim. That was certainly true of me.
But now that I've worked my way through it, I think it's not only the best plan on offer, it's by far the best on offer. The only plan I like better is Doug's plan to set up a kind of giant national Mitchell-Lama co-op corporation. But I love that plan like a fond dream. The same thing that makes it truly great (the large-scale decommodification of housing) makes it also something no one including Doug expects to see any time soon.
Jordan's plan I think is as close as we can get to Doug's plan and still have a plan that really could conceivably pass in the current climate. It's certainly way better than Dean Baker's plan, which, mea culpa, I originally boosted in the naive belief that the unseen parts added up -- only to find that the parts unseen were also unthought and his proposal is completely incoherent. And it is far better than Obama's plan, which as currently sketched out, only affects the foreclosed and not the underwater; and of the foreclosed, only affects 40% of them; and of the ones it offers help, may not offer enough for many them; and of the ones it helps enough, claws nothing back if they make later gains from our help.
Jordan's plan beats it on all those counts, while also fundamentally changing the housing market in the long term in a way that is pretty radical and pretty great.
So, with that in mind, below is my longer and more simplified description of how Jordan's plan works.
Preliminarily I've decided to call it The Warrant Plan, for the warrant with the government gets on the house. (Jordan calls it an option, which is technically the better term, although they're pretty much synonymous in this context. The reason I prefer warrant is that it sounds like more reassuring, like warranty, and less like casino finance, which scares people.)
To keep things clear, I use terms like "all" and "none," and when I use numbers, I only give one. In reality of course, everything's on a continuum, things happen over time, and every numerical threshhold is worthy of debate. All that makes the numbers more complex and the dividing lines more fuzzy. Jordan's original post deals with those issues, and anyone who has questions on that score should go back and take a look at the original
http://mailman.lbo-talk.org/pipermail/lbo-talk/Week-of-Mon-20090216/002441.html
I've left all that out here to make the plan stand out in bold outline.
<begin explanation>
There are two steps to the Warrant Plan. In the first step the government is going to try to vacuum up as many mortgages as it can by buying them en masse from the banks or whatever pool servicer is holding them. Then we-the-people will essentially transfer these mortgages to a new, improved, bigger, stronger, Ginnie Mae.
The basic premise is that the private banks have fucked up what Ginnie Mae did perfectly for decades. Ginnie is admittedly worse than it used to be decades ago, but that is almost entirely because it steadily incorporated deleterious aspects of the private market.
What we want is to return Ginnie not only to its original pristine glory but make it even better than it was. Forget this pretence of competition with the private sector. We'll solve the housing bubble problem once and for all by having a tightly-regulated government-owned entity running virtually all of the secondary market, and everyone else will have to conform to what it says. There will be one master in this market, and its goal will not be to maximize profit, but rather to provide the cheapest possible finance for homeowners that is compatible with a stable market -- using "stable" in an extremely robust, macro-prudential sense.
Jordan's creative technical twist lies in how we buy these mortgages, and later how we refinance them. In both cases, we split them into two parts: the price the houses are currently worth, and the part by which the mortgage exceeds that current price.
When it comes to buying the mortgages from the banks, we-the-people will gives banks cash equal to how much the houses are worth. That part doesn't cost Us-the-government anything, because we'll be receiving value equal to what we paying. But for the overage, we'll pay on credit. We'll give the banks special restricted treasury bonds that promise to pay the rest in 10 years. Essentially we'll give them IOUs that we'll pay them later.
There are two cool parts to this solution. One, is that although we're not really paying the overage part in full yet, the banks can act like we did, because those treasuries can act like money on their books. They can use them as first-rank tier one capital. This will help them weather the current financial crisis and give them more means to lend. And two, the hope is that in 10 years, when we do pay this part back, the houses that we own the mortgage on will have raised in value. Theoretically, and ignoring the fudge factors of reality, if in 10 years the houses have finally returned to their original price, this whole subsidy won't have cost us anything. And in every possible case that falls short of that that I can think of, we'll still be better off doing it this way than if we'd just ponied up money.
This is old fashioned financial magic. It's reasonable, it's moderate, and multiplies our power to initiate great projects -- and to in particular to get out of a bind -- by time machining to the future and smoothing out the economic low and high points, taking some from the high point in the future, and moving it to the low point in the present.
This then brings us to the consumer side, where we do a kind of similar thing.
First note that we-the-people now own the mortages -- thus definitively solving the problem of who's got the damned authority to change them.
And the change we'd make is analogous to the way we bought them: we'd divide the mortgages into what the house is worth, and the problem overage.
For the first part, we'd be about generous as you can be. We'd give you-the-strapped-homeowner a new mortgage that is slashed down in amount to how much your house is worth now. In one stroke, you're no longer underwater. If you need to sell the day after we refinance you, you won't lose a penny. You're free.
In addition, not only will it be substantially smaller, but we'll make this a 40 year fixed mortgage. Given current low rates, this is the ideal mortgage. It provides the lowest conceivable stable monthly payments. If you can't afford the monthly payments on this deal, then there's simply no way you could ever afford your house and we can't help you.
So under this plan, no one in need who has any conceivable capacity to pay their mortgage will be foreclosed on.
This brings to the second half, the overage. Let's say the house is now worth $300,000, and the original mortgage was for $400,000. We-the-people will give you a new long-term, low rate mortgage for $300,000. And in return for our $100,000 of loan forgiveness, we'll get a warrant on the house for the same amount.
This warrant mechanism is pretty novel and cool in this context, but it's not hard to grasp how it works. If you sell the house for $350K, you zero out your mortgage, and we-the-people get the extra $50K. This how we claw back the money to pay the treasury IOUs we created in step one. This is how this plan seeks to pay for itself once the housing market recovers.
One especially interesting thing about this warrant is that it stays with the house. So when you make this $350K sale, you're done, and you can go buy an unencumbered house, without any of the underwater stuff following you around. But the guy who buys your house now has a $350K house with a $50K warrant on it. If he sells it for $450K in 5 years, we-the-people will take back the remaining $50K, and he gets to keep the other $50K. In that wonderful case, we-the-people will not have lost a dime on this deal.
However, it should be obvious that a $350K house where the first $50K of profit is not yours is worth less than a normal $350K house. This should tend to keep the price of these houses down -- and thus the price of housing down -- while at the same time allowing everyone to avoid foreclosure or suffering underwater losses.
Doubtless fascinating speculative discussions could be conducted on how this warrant would affect the relative price of such houses and how that would affect the housing market. But that's for later discussion. My point here is simply to get across the basics.
One important point to note, though, is the built-in defense this provides against moral hazard. Nobody is going to take this deal in order to make money. People will only take this deal to avoid getting thrown out of their houses.
(It it isn't too confusing, I might point out Jordan goes even further and says that if by some miracle you-who-made-this-deal-with-us make a profit off this -- e.g., you sell the house yourself for $450K -- our warrant gives us not only the $100K we forgave you, but a large percentage of that $50K profit too. But after you sell it, this profit-taking part of the warrant lapses and the new owner is only encumbered up to the end of the overage as I described above.)
That's it.
IMHO, on the two big questions asked of any bailout plan
1) Will we-the-people recoup any upside gains? and 2) Does this separate the needy from the greedy?
This proposal comes through very solidly indeed.
On top of that, it helps way more people to a much greater extent than any other housing aid plan being presently considered.
And it radically rationalizes the housing market and to prevent something like this from ever happening again. Not to mention fundamentally changes the relation of government to market. It does for housing finance what single payer would do for health care.
What's not to like?
<end explanation>
Michael