Pick a plan, any plan: Part 2, send more money?
Now that America’s drunk from the cheap-money well, as we cast about for rapid-relief cure for our debt hangover we must adapt to the through-the-looking-glass financial world in which we have suddenly found ourselves:
One moment our real estate world was familiar, and then …
… there we were on the other side.
So far, I’ve been fairly jaundiced about the quick fixes cited by The Boston Globe’s Jenifer McKim’s list of:
Six steps to fix the housing market
Coming up next is:
4. Share the pain, gain
A growing number of proposals resurrect an idea known as “shared appreciation mortgages,” in which struggling homeowners would be forgiven a portion of their mortgage debt.
You two need to learn how to share
Shared appreciation is a fine concept, if used to bring a new applicant into a first-time homeownership. By lowering the required monthly payment, a shared-appreciation loan gives the borrower controllable occupancy cost, a critical safety factor for lower-income households.
In exchange, if the home appreciates in value or the borrower later sells at a profit, the lender would get a share of that profit.
There’s only one flaw: it means taking big writedowns first.
Meanwhile, Hope for Homeowners got off to a slow start, partly because lenders are required to write down loans to participate.
Who gets something back from the recovery? Not the old lender, the new one: FHA.
Your tax dollars at work
The arrangement is a component of the federal Hope for Homeowners program, a new loan program at the Federal Housing Administration that refinances mortgages for homeowners who owe more than what their house is currently worth.
This is just a variant of loan modification, done via FHA (meaning the taxpayers will pay for it), with some possibility of recoupment.
Academics such as Andrew Caplin and Thomas Cooley of
It does.
The shared appreciation model was used years ago in limited measure, but has largely stalled because of an arcane tax ruling by the Internal Revenue Service.
Actually, it stalled because it’s more complex, takes more administration, and was supplanted by the quicker, simpler, and more profitable subprime lending.
Okay, maybe subprime wasn’t so profitable …
Can I take that trade back?
5. Buy cooperation
Yes, they are; it’s called living up to one’s agreements.
“Even if legal issues are eliminated.” How does she propose to do that? To do Ms. Warren credit, she’s probably simply pointing out the need to incentivize loan servicers as well as finding a means to get the loans into a position to be modified.
She proposes the
Interesting, but a nasty agency risk, since it does nothing to assure that the ‘fixed rate mortgages with an affordable payment’ are actually repaid. And if the servicers simply cut the loan balance so heavily to make it certain, who takes those losses?
Because somebody has to …
Secondly, she said owners of second mortgages, who often block modifications because they stand to lose money, should receive a 10% bounty on the face value of the loan for writing it off and getting out of the way.
This is basically buying all second mortgages at a fixed price. You’re either overpaying or underpaying,
In short, it assumes away the real problem, which is getting the loans reset to their payable level. In fact, that’s so important I’ll put it in a box:
The real secret of loan restructuring
Somebody has to absorb the writedowns.
· Once we know who’s going to take the loss, it’s easy to choose among numerous restructuring plans.
· Until we know who’s going to take the loss, none of these ideas will go anywhere.
6. Reform bankruptcy laws
This is another idea that has been around the track before and remains popular.
Popular with people who owe money, that is.
Some Democratic lawmakers and housing officials want to amend bankruptcy laws so judges would be allowed to modify a debtor’s mortgage as part of a bankruptcy proceeding.
Ack! Nuts! Nutty!
I’m the expert in favor of judicial mortgage modifications in bankruptcy
The plan was excluded from the original bailout plan but proponents want to re-insert it in the new stimulus. Nobody wants to go into bankruptcy –
Actually, some people do use bankruptcy as a financial purgative.
– but when losing your home is the other option, advocates of the law change say this could make a world of a difference.
Many states have ‘homestead;’ laws that prevent a homeowner from losing his or her primary residence even in a Chapter 7 bankruptcy.
I’m a distinguished professor of illogic and I say it works
Some hope the law change would push lenders to work harder to modify loans before going to court.
In the short run, it would certainly do that. But then, the short run is followed by the long run:
Opponents, however, counter that this authority would violate the sanctity of contracts –
It would. The litigation would be enormous.
– and be a remarkable intrusion into private business matters.
To say nothing of making sure that nobody marginal would ever get credit again, and pushing up the cost of borrowing for the rest of us.
It’s noteworthy that Ms. McKim found no one willing to go on the record to defend this proposal, because it’s utterly, completely cock-eyed.
So much for our critics
Summing up …
Of the six fixes thus proposed, none of them looks especially appealing. They’ve all got major problems, or assume away the critical issue – namely, that somebody has to absorb the writedowns. Once that happens, it’s easy to choose among numerous restructuring plans, and until that happens, none of these ideas will go anywhere.
They’re all jokers in this deck!
H. L. Mencken put it best: For every problem there is a solution which is simple, clean, and wrong.
A misanthrope, and proud of it
Mencken’s dictum holds true for our current predicament.
There’s no easy way of dodging the pain.
This is going to take quite a while to work out.
We’re drowning in a pool of our own tears
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