Pick a plan, any plan: Part 1, send money
In today’s modern now a-go-go world, we want instant gratification, instant retribution, instant resolution – and we become first impatient and then irate when it is not immediately forthcoming. So it is with our economic woes and the housing price downturn. Now that we’ve realized it, we want it over, and our search for a fast-acting nostrum, we’re liable to drink the first appealing potion to come to hand:
What could possibly go wrong?
In that spirit, Jenifer McKim of The Boston Globe offers up six prescriptions:
6 steps to fix the housing market
Drink first, think later?
Let’s look at their plausibility and wisdom:
The housing market is beginning to resemble one of those super bugs that are resistant to modern medicine: Despite injections of help from the government and lenders, it’s still sick. Foreclosures continue at an alarming pace, sales are few, and mortgages are hard to come by.
That’s not evidence. Remedies take a while to work, you know?
We’re apprentice wizards, these spells take a while
Just this week Treasury Secretary Henry Paulson said he would not use taxpayer funds to buy up troubled mortgage-related securities, as was originally intended by the passage of the $700 billion federal bailout bill.
Instead, as I’ve posted extensively, Paulson has a shrewder strategy: make the banks clean up their own messes, and use the GSEs (Fannie Mae and Freddie Mac) as a private Resolution Trust Corporation (RTC).
Meanwhile, is it the same people who, just a few weeks ago, worried that Treasury would have too much authority, and would make bad purchases and overpay for the complex assets, who yearn for them to Treasury to do just share?
But Treasury doesn’t have any powers!
Congress is expected to develop a new economic stimulus package in the coming weeks, and many housing industry officials and activists hope lawmakers will use the opportunity to devote more attention to fixing the nation’s real estate problem.
Since these are two of my tribes, I can translate this request by not-disinterested parties:
We’re still hurting. Please give us more money.
See how smart I am?
Here are six of the top ideas being mulled in
Are these any good? Are they fast relief, or more headaches?
Maybe I’ve taken on too much?
1. Cut the [mortgage] rates
How does a 2.99% mortgage sound? Silly? Maybe 5.25%?
Depends on how the rates fit on the risk curve.
Discount loan rates could draw home shoppers off the sidelines and into the market, boosting sales and helping to check falling housing prices.
Maybe. Probably not. A lot of those who would buy new homes already own homes elsewhere. The national homeownership rate reached an all-time high a year and a half ago, and if the total number of homeowners is shrinking, cutting their rates won’t do any structural good at all.
One proposal, plugged by
Refinancing is different, and the rate chosen is one I suspect the authors believe approximates market. The proposal is thus intended mainly to create controllable occupancy costs for existing homeowners, and prevent more defaults.
Yet as structured, this proposal would simply lower the occupancy costs for all homeowners, a proposal that my Harvard professor friend Ed Glaeser has already ridiculed, and while I don’t completely agree with him, he makes a good point.
Cross my heart and hope to die
You’re nuts to use rates to keep prices high
The National Association of Homebuilders, with 235,000 members, wants Congress to include in the upcoming economic stimulus package a subsidy on conforming 30-year loans that would lower the interest rate to a bargain 2.99%. The rate would be for all mortgages on homes purchased through June 30, 2009.
At least that’s (a) not a refinancing plan, and (b) time-limited. The bad news is that the subsidy costs would be quite large, since they’d apply for the loan’s life – up to thirty years.
For homes bought in the second half of 2009 the subsidized interest rate would be 3.99%.
Or does that risk another nasty rate reset?
Probably a bad idea.
2. Make like Sheila
Sheila is Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., who’s become something of a cult hero among housing activists because of what she’s doing for customers of failed IndyMac Bank who are facing foreclosure.
I can write down loans using this very pen!
Her agency is systematically modifying these mortgages to more affordable levels, so borrowers’ monthly payments are as low as 31% of their income. Already around 5,000 customers have had loans adjusted by an average of $380 a month or about 23%. Methods include:
Lowering a loan’s interest rate
Forgiving some of the principal debt
Extending the repayment period.
All three approaches work fine if the lender owns the whole loan. As I’ve previously posted, securitization has complicated a restructurer’s life.
Importantly, Bair would pay loan servicers $1,000 for every mortgage they modified, giving them an incentive to work out, instead of foreclose on the loan.
Another good idea. Loan modifications and restructurings take work, so paying people to do it will compensate them for the brain damage.
Who’s going to compensate me for this?
Bair wants to expand the IndyMac model across the industry. One problem: Too many of the borrowers who receive help still have trouble affording their homes and end up being foreclosed on again.
As I’ve posted in why are you in trouble?, loan modification presupposes that the borrower can stabilize his or her income and repayment ability.
The FDIC proposes that the
Paulson’s doctrine(s) involve investing money, not repackaging subsidy as equity infusions.
3. Own the loan
Senator John McCain,
I’m sure that both the Senator and Mr. Frank are more precise than that. The mortgages have been securitized, and there’s probably no provision in the securitization governance to allow the securitizer to sell out its sole collateral (except at par). You have to reassemble the little pieces parts before you can buy the loan.
We know you can’t buy loans, you have to buy paper … don’t we?
This, they argue, would speed the pace of loan modifications, more quickly helping distressed homeowners avoid foreclosure.
Yes, if you then hire all the restructurers you need.
One novel approach involves using the government’s power of eminent domain to take, not the property, but the loan notes from investors who may be reluctant to part with them.
Fortunately or unfortunately, ‘novel’ here means ‘unsupported by the Constitution or any relevant statute.’ Eminent domain applies only to property, not to financial instruments.
During the presidential campaign, McCain suggested using around $300 billion of the bailout fund to buy hundreds of thousands of loans. The government would then issue those homeowners new loans at more affordable levels. Other supporters have suggested the original lenders would have to forgive a portion of the old loan, if the home has since lost value, as part of the buyout agreement.
See, that’s the problem – who takes the loss?
If you buy the loans at par, the government takes 100% of the loss, probably more because the government would then have to pay all the people who do all the restructuring.
If you buy the loans at a discount, you either have to negotiate each pool – taking time – or have a forcible extraction. The latter’s Unconstitutional and would embroil the government in litigation for decades; the former’s as complicated as restructuring the loans.
Which is why Secretary Paulson hit on the brilliant strategy of forcing equity capital into the banks and making them clean up their own mess.
But now that Paulson has nixed the idea of spending bailout funds on mortgages, it’s unclear where funds for a loan buy-up would come from.
It’d be so much simpler if it didn’t cost any money, wouldn’t it?
Money makes the debt go around, the debt go around
[Continued tomorrow in Part 2.]
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