Bruce Marks of the Neighborhood Assistance Corporation of America — an outfit that has probably done more than just about anyone else to combat predatory lending and help low- and moderate-income folks buy and stay in their homes — makes a pretty compelling argument on today’s Globe’s op-ed page. His basic point: the problem is foreclosures. Foreclosures destroy the value of mortgage-backed securities, because when foreclosure happens, the mortgage blows up. Obvious solution: stop the foreclosures. Instead, require whoever is servicing the loan to go into a workout with the borrower, which probably involves cutting the interest rate, perhaps restructuring the loan into a fixed-rate product, and maybe even reducing the principal. But the point is that the borrower keeps paying something; maybe not what the loan originally called for, but something. Incidental but quite important side effect: borrower and borrower’s family don’t lose their home. Here’s Marks’s bottom line:
Taxpayers must tell Congress and the administration that “it’s the foreclosures, stupid” and have them address this underlying issue. They must immediately put a moratorium on foreclosures for owner-occupant homeowners. Then through regulation, legislation, and/or economic incentives, they must demand that homeowners’ mortgages be restructured to make them affordable for the remaining term of the loan. If the Neighborhood Assistance Corporation of America – as a nonprofit – can achieve affordable solutions for thousands of at-risk homeowners, the government – with its regulatory and legislative power – can achieve the same results from these servicers and investors.
Let’s take that apart a bit. First, as regulator, the government stops the foreclosures for owner-occupied homes. Drastic? Maybe. So is spending $700 billion to buy a bunch of crap. Second, there must be some clever way that the government can require the restructuring, or perhaps even guarantee, some of the loans, thereby helping both the homeowner and the lender. Does that create a moral hazard problem? Yeah, maybe. So does spending $700 billion to buy a bunch of crap.
Wouldn’t this both increase the value of the mortgage-backed securities out there, and also make them easier to sell? And wouldn’t that help solve the problem that, we’re told, needs to be solved quickly? Finally, wouldn’t it accomplish those things without unseemly taxpayer-funded payouts to Wall Street? I mean, given the choice between some kind of bailout to a Wall Street exec who blew a bazillion dollars because he didn’t know what he was doing and thought money grew on trees, or to the poor shlub down the street who got himself into a mortgage he couldn’t afford and is now at risk of losing his house, I’ll take the latter. More on these issues in this interesting article.
Oh, and on the whole crisis thing, I’ll reprint here a comment I made in another thread.
I’m really starting to wonder whether the crisis is so bad. I mean, here we are several days after AIG. There’s no bailout yet, and no clear indication that we’ll get one anytime soon, yet no one else has failed. Goldman and Morgan are all set — they’re bank holding companies now, and Buffett is investing. Lots of other big outfits like Citi are doing OK. The stock market seems basically stable. Yeah, there are issues to work out. But this ain’t no freakin’ asteroid heading for earth. That’s the kind of alarmism that leads to dreadful policy. Thank goodness Congress (at least so far) is not going along with it.
Is this really anything like 1929? Really?