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?
David Leonhardt in the NY Times today discusses something that I haven’t seen mentioned yet: exactly how many cents on the dollar are we going to pay for this stuff?
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p>His answer is that any premium over 25% of the worth should be paid only in return for equity stakes in the firms from which they are bought and argues that the price could be brought down as far as $100 billion. That’s still a lot of money, but isn’t the idea to “buy low, sell high?”
that’s another huge problem with the cash-for-trash plan. If the gov’t buys them at their market value, it doesn’t solve the capital problem. If the gov’t overpays for them, it’s just handing taxpayer money to people who in no conceivable world deserve it.
Here is an interesting, and much more sophisticated, approach to keeping people in their homes. It’s long. One excerpt worth thinking about:
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p>It’s becoming clearer and clearer that the Paulson cash-for-trash approach is a loser, and that there are much, much better ideas out there that both spend taxpayer money far more wisely and also get at the root of the problem much more effectively.
Pigs get fed. Hogs get slaughtered. Let the whole damn thing fail and start all over again. Just a thought.
You shouldn’t transfer the debt to the next buyer. It should end at the next sale. Put in a clause stating that if the house is sold for less than fair market value then the owner has to pay the difference, to prevent people from selling their house to a friend for an unreasonably low price. Alternatively, let the bank buy the house at the agreed on price if they think it is too low.
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p>The problem with carrying the debt forward is that nobody will ever agree to take it. Continuing your example, the house would have to be worth $300k before someone would agree to pay $250k for it, because if you buy it for $250k you are also buying a $50k debt, so you are effectively paying $300k. If the house is actually worth $200k when you want to sell it, you won’t be able to sell it for more than $100k for the same reason.
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p>If you want to ensure that the bank eventually gets repaid, then the debt should follow the borrower, not the house. So if the house is sold for $250k and the borrower buys another house, the $50k of remaining debt would be transferred to the new house. Of course that effectively means that anyone who signs up for this program will never have any equity in a house they own.
the Marks idea better. It seems simpler – and we’re talking about having to deal with millions of homeowners and mortgage companies. Better to force those two sides to the negotiation table, create a fixed rate, add a few years to the mortgage if necessary and perhaps reduce the principal owed on the loan. It’s honestly good for both sides, will help this government spend as little as it needs to and recognizes the fact that there are no true moral victors here – banks giving bad loans out, convincing people they could afford them or get out of variable rates when they went up high – as well as people who took on a little bit more than they could chew. It’s common sense to this blogger’s ears.
If you reduce the cash-flow, then you reduce the value of the MBS. For a fixed term fixed interest rate loan with no prepayment option, the value of the MBS is a fixed multiple of the monthly payment. Adding in a prepayment possibility makes things much more complicated, because the value of the MBS depends on when the mortgages will be paid off. But basically the answer is, no, you cannot adjust the mortgages to reduce the monthly payments without reducing the value of the MBS’s.
because no one is buying, because they’re afflicted by foreclosure which means borrowers aren’t paying anything. Sure, if you restructure the debt the MBS’s value will be less than the original plan. But at least it’s something — some cash flow is better than none. Reducing the face value (if such a thing exists with these products) strikes me as an acceptable price for making them marketable at all.
We could allow foreclosures to proceed at a natural pace, which would then allow the rest of the market to function appropriately. Here is an alternative interesting article that I tend to agree with.
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p>Question: if you were a lender, and you all of a sudden could not forclose but had to eat it on mortgage defaults, would you continue lending?
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p>Its time that we realize that at least half of this problem is due to irresponsible borrowers. I agree with the concept of not rewarding bad behavior, fully.
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is to do nothing. I can see some merit in that, but a lot of downsides too. It seems much more risky than doing something about the foreclosure problem.
There is an argument to be made that foreclosures, and more of them, sooner, is the solution, rather than the problem. That is, if the problem in the credit markets is the result of the over-valuation of real estate. No better way to correct the market than to sell all of this over-valued property. The sooner the better.
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p>The more I think about this, the more I realize that the political parties are each out to punish “the other guy” who behaved badly, and to provide massive rewards to “their guy” who also behaved badly. Each by pretending their own guy is an innocent victim.
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p>I have sympathy for the homeowner who took an Alt-A mortgage, on the assumption that the value would rise, and he could refinance. I also have sympathy for the financial executives who didn’t realize that they had dramatically underestimated the default risk, and that the risk wasn’t as diffusely spread as they believed. However, I do not wish to reward either of these people with dollops of unearned taxpayer money.
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p>I suppose that I would be content to use taxpayer money tot he extent necessary to prevent the credit markets from freezing, and that’s it. To the extent that one or the other bad actor gets a windfall from this, that is unfortunate but necessary.
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p>I am beginning to see the value in standing pat, for now.
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p>2. The fundamental reason why some people suggest these companies need to be bailed out is so that they’re still able to give out loans – at all. Without loans, the economy is pretty much dead… so we do need to make sure that people who are qualified to take on debt are able to do so at reasonable levels.
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p>3. That said, I DO agree with you that measures need to be taken so that this available debt doesn’t lead to overvalued property. Basic measures like requiring down payments, or fixed rates, etc. are sensible solutions, I would think.
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p>Furthermore, if the country places more emphasis on affordable housing instead of an emphasis on cheap loans, that’s one built-in way to make sure that the market doesn’t get out of whack. Imagine if the state’s goal of 20% affordable housing in every community were actually a reality – and the impact that would have on housing prices for the middle and working class?
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p>Current affordable housing policies – such as the ones that allow developers to bypass local zoning law – doesn’t really increase a town’s proportion of affordable housing. For example, they may be required to offer 15-20% of their units as affordable, but if the town or community only has 5-10% affordable housing… and only so much land for development available… then the gap to reach the state’s goal actually widens in that town, while the developer builds some monstrosity that pisses off people in the town (and sets them dead set against ever adding more affordable housing or mixed income housing). A smart idea, to me, would be to create some policy that gets people to sell their homes as affordable – a huge tax credit in proportion to their home – and, in doing so, forever making the home an ‘affordable’ home passed down from owner to owner.
The best thing that could possibly happen for affordable housing is for the price of real estate to fall. If you are opposed to allowing foreclosures to proceed, you are thus opposed to the most effective means available to aid the low income prospective homeowner.
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p>I also don’t necessarily see how allowing foreclosures to proceed might increase poverty and homelessness. That is mistaking the sob story on the local news with reality. Indeed, the best response to the nitwits on the right who claim that all of this is due to the CRA, is that the deafult rate of CRA loans is lower than loans made on more valuable property. That is because the CRA loans are both fewer in number and lower in value.
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p>In reality, people bought huge, huge houses for no money down, and got “jumbo” mortgages with funky provisions to finance the purchase. Now these people claim poverty of all things, and humbly request that the rest of us kindly fork over so that they may continue to live in their oversized house? No. Maybe I’d be willing to consent to a tax deduction for the moving van, but that is about it.
Subject line purely tongue in cheek.
I’m not really against the so called “bailout”.
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p>I tend to believe that when Paulson and Bernanke are saying to the world “IT IS URGENT THAT WE DO THIS”, that they may know what they are talking about.
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p>Bernanke is one of the world’s foremost scholars on the Great Depression and I think he’d rather like to avoid another one.
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p>So I’m saying (you’ll love this): bail out the banks, AND let the homes foreclose.
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I’m not inclined to believe that someone who was claiming that the economy was fine 6 months ago knows how to fix this mess. There were plenty of people who could see what was going to happen over a year ago. Why believe someone that either didn’t see this coming or lied about it until it became almost impossible to fix? Paulson has no credibility on this issue. Bernanke has some, since he has actually been doing something about this since last August, although he has been denying that there were serious problems all along.
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p>The crisis is not with the CDS’s or the investment banks. That is something that will affect some investors and cause lots of money to be lost. The crisis is in the money markets. What happened is that a money market mutual fund last week broke the buck. This led to an almost immediate withdrawal of almost $200B from the money markets. The money markets are where companies get the short term loans they need to run their daily operations. Providing government insurance to the money markets should have fixed that problem. The rest of the bailout is a get-rich quick scheme for investment bankers.
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p>2. Investment banks have all either gone under, been absorbed, or changed into regular banks in the past month or so. Hadn’t you noticed? Which investment bankers will “get-rich quick”, and how, exactly?
If the process had been started 6 months ago, there wouldn’t be pressure for congress to approve a bailout plan without time for debate. If Paulson had started saying 6 months ago that we were facing a potential crisis in the financial markets and made a few proposals to congress, then we could have spent the past 6 months debating the proposals. Various experts could have analyzed the proposals and come up with potentially better ideas. Instead, he waited until there was no time for debate or careful thinking.
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p>Goldman Sachs still exists. Paulson was CEO of Goldman Sachs for a long time and could potentially be offered a job there again. At any rate, he certainly has many friends that still work there. There is a clear conflict of interest. Given that he has a conflict of interest and that he is either too clueless to have seen this coming or intentionally waited until he could declare a crisis with no time for thinking, I can’t imagine why anyone would trust him.
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p>If you want some conspiracy theories, look at Gaming the Market.
Gee, I don’t know, maybe something that would have prevented us having to buy Fannie and Freddie Mac, 80% of AIG and avoided the bankruptcy of Lehman?
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p>Even banks that have been doing WELL, per the Paulson, will be able to dip greedily into the $700 billion. Why should the taxpayers of this country have to “bail” out banks that are doing well? What do we even call that – it’s not exactly “bailing them out” because they’re not in danger of going bankrupt.
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p>I’m not sure the crisis IS in the money markets, but no question it WAS in the money markets. I think the ‘crisis’ there was averted with FDIC insurance.
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p>It’s curious Paulson can’t seem to sufficiently articulate the abyss that he claims, with Bernanke to foresee. On Sunday (face the nation? meet the press?), Dodd was asked what might happen, and Dodd did his deer in the headlight imitation.
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p>I wondered at the time why these guys can’t spell it out, and now I figure it must be by design or general agreement.
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p>The run on the money markets was pretty spooky last week, and I think that Paulson, Bernanke…don’t want to say the words to the public that, they fear that the next run will be on the banks, or on the stockmarket, or in the corporate bond market, or in the hedgefunds or all of the above.
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p>On another note, there seem to be a few folks in this blog with experience in the financial business–you among them–yielding some very good thoughtful and often provocative commentary.
None. And their, its all good, no it’s a crisis, not so urgent, urgent, can’t have limits on pay, oh wait yes we can meanderings have not added to their credibility.
Which to me sounds like the biggest reason to bailout the mortgages first. As I’m beginning to understand this, a bad mortage just starts the dominos and it is the speculative bets placed on whether a mortgage fails or not that’s driving this crisis. Just to make up numbers, if a $100,000 mortgage fails, another $500,000 is lost from the crazy speculative bets placed on whether the mortgage would fail or not.
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p>So, in my example where I’m sure the concept is correct but my numbers are made up, saving a $100,000 mortage with some kind of governement action, saves the need to spend $500,000 to bail out the Wall Street speculator and prevents a $100,000 mortgage default.
Since most of the speculators are billionaires to begin with, why dont they pay off the mortgages for the deadbeats and everyone would make a killing and live happily ever after. Is there a rule against such a thing at Gino’s House of Craps?
It’s not the foreclosures.
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p>Foreclosure rate is only something like 3% or something thereabouts. It’s the uncertainty associated with securities because of the possible future foreclosures + declining collateral value.
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p>Your solution. Announce the cessation of foreclosures, and remedy the 3% rate. However, the uncertainty remains or is made worse because even though you have the government behind the 3%, you now have the uncertainty of the effect:
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p>i) moral hazard players who default because they want a piece of that government action
ii) continuing decline in housing prices and
iii) cessation of lending by banks because they won’t lend if they are legally constrained from foreclosing on future loans.
We can’t have the moral hazard of helping American people. But a blank check to the corporations? No sweat.
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p>As I said in another post, Gary… insults wrapped in smug arrogance… Have a nice day!
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p>Do you actually know what moral hazard means? Because in the context of the quoted sentence, it’s kinda meaningless.
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p>http://en.wikipedia.org/wiki/M…
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p>According to what you’ve been writing here and elsewhere, it would be a moral hazard if we were to come to the rescue of ordinary Americans in this scandal, because they should be accountable for their actions and it would set a dangerous precedent. And more people would want help – imagine that, people who are struggling and own homes worth a fraction of what they bought it for are asking help, trumped up in large part to the too-generous loans these investors have been giving out as if they were free toasters for opening up a checking account. What a terrible moral hazard – helping people. My God!
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p>Maybe. But surely it’s an even greater moral hazard to hand over hundreds of billions to already wealthy investors. Right or wrong?
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p>By the way, I love the latest example of your insults wrapped in smug arrogance. No one could possibly understand the issues like Gary can. He’s so darn knowledgable, that Gary! Never wrong! Other people disagree with him? Surely that means they’re stoopid and don’t understand! Surely!
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p>To the last question. There must be means to curtail similar excesses in the market in the future, and the potential for moral hazard is high unless following the bailout, regulation is written to minimize or eliminate the high leverage using illiquid and potentially insolvent assets. Certainly the possibility for moral hazard at the institutional level isn’t a short term problem as this UK’s independent articulates:
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p>Greater moral hazard in the long run? Can’t say. If you’re claiming it would be greater, make the case rather than whine that I was mean to you with my smug attitude.
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p>Exactly. The immediate creation of moral hazard by directly bailing out homeowners could be extreme as the NYTimes discussed back in February as the trial balloons floated about the very bailout we now wittness.. ONLY (heh..only), about 3% of homes are in foreclosure right now. The fear is that IF the government bailed out those 3%, it would immediately accellerate a wave of defaults as the people who sought government assistance, stopped paying and merely started waiting on their welfare. Now if you’re making the case that either (1) nah, people would do that or (2) we the government ought to cast blanket protection to any taxpayer with a high debt ratio, then make that case. Do it smuggly, or meekly or in ALL CAPS. But, make the case.
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p>There’s a great deal of evidence that the majority of ‘walkaways’ are either vacation homes or investment properties, (purchases of which set record highs in 2005 and 2006) which would not qualify. In fact, the ease with which people are walking away might point to the fact that they are not primary residences. Any welfare for homeowners would go to homeowners and not speculators.
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p>If the term ‘predatory lending’ has any meaning whatsoever then the wide swath of speculators and vacation home owners cutting through the housing market might have encompassed some earnest primary home owners. These people need and deserve help.
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p>It’s also worth noting, as I have before, that Paulson and Bernanke believe, quite earnestly in fact, that they are not bailing anybody out. They are, in point of fact, merely going to do all the bookkeeping that wasn’t done. They feel, rather strongly, that the panic is overwrought and is artificially driving prices down. The hope is that, if they can come in and straighten things out, things will end up being sold at the ‘correct’ price and the government will recoup all it’s money and maybe come out ahead. I don’t agree, but that’s what they think. They’re taking a wholly top-down approach and seem to think that, if they can straighten out the pricing structures so that everything gets sold at fair market value then the defaults and foreclosures can proceed as in a normal market situation. It really is trickle down economics and they seem to regard predatory lending practices as… well… the trick in the trickle…
Everything you said is arguably correct.
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p>But it doesn’t go to my point.
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p>I’m seeking for Ryan to substantiate his bold claim that financially assisting “These people [who] need and deserve help” won’t cause more and more people to step forward, claiming to need help as victims and thereby creating more defaults than would have existed otherwise.
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p>I’m sure that some people will try to game the system, though I don’t fear it will be an overwhelming and ravening horde as you, apparently, do. People are trying to game the system right now.
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p>Legitimate defaults occured yesterday. Some will occur today. Still others, tomorrow. Defaults will continue to happen. Because of the circumstances some of them ought to be assisted. Others will seek assistance and ought to be laughed at and their homes taken. That’s entirely within the scope of the solution.
… might game the system isn’t an excuse to abandon the system, unless it happens in unsupportable numbers. Even then, the first option should be to find out if the rules can be tightened successfully. Just because there are difficult problems to be worked out in the details doesn’t mean the whole effort is unworthy. It means it time to roll up your sleeves.
Again, no disagreement, except to say that IF “[additional defaults] happen in unspportable numbers” it’s too late. The Fed has claimed as much and made public statements to this effect:
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p>I’m merely asking that Ryan either support his statement or not. His opinion appears different from yours, and petr’s and mine.
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p>Were I to make a blanket statement that it’s beneficial to bail out banks because it’s the American way, absent some support, I’m pretty sure you’d call me on it.
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p>His appears to be a position that we have to bail out homeowners, moral hazard be damned, and I’m calling him on it:
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p>… depends on the details. All that need be said is that I can conceive that it is plausible that details could be hammered out to minimize or mitigate that hazard. After all, the whole industry supplied (or were supposed to supply) credit based on some qualifying criteria,… why shouldn’t the application for relief be any different? Why
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p>To ask him to prove that it “won’t cause more and more people to step forward” is to ask him to supply all those details right now. It is to ask him to solve the crisis with all those all by himself. Therefore, I don’t find it a productive question in this context.
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p>Of course when people agree on the principals that there should be some remedy in the final picture where “these people [who] need and deserve help” get some, it’s entirely appropriate to ask about the particular mechanisms by which moral hazards will be avoided or mitigated. It’s a question that should be asked by and to those who are hammering out those details.
1st – I responded to your points in another, new post to this thread of discussion just a few minutes ago. Please read it there.
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p>But I want to tackle this point:
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p>That is not my position. This is another attempt to warp someone else’s position, as is one of your favorite tactics. Don’t tackle the argument the other person is making, frame the argument and tackle the one you want. Sorry, Gary, not on my watch.
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p>I’ve publicly supported:
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p>1. That we take both a short and long term approach to tackling these problems. In the short term, keep the businesses in business. That may mean mini bailouts. This is a band aid approach to buy us time to really investigate the matter.
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p>2. The second thing I’ve called for is that if we’re going to bail out the banks with a massive hundreds-of-billions number, then we need to make sure we’re addressing the real problem going on here – which is people who are losing their homes or are in danger of doing so. All I’m saying is it’s not fair to make already-rich investors much richer (when they could have bit hit hard) – and not help regular people too.
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p>If we’re going to bailout the companies, the American people must profit from this as well – in the form of tough measures to keep as many people in their homes as possible and tough regulations to prevent these problems en masse from happening again. Not everyone should be bailed out – both people and company alike, but there’s a lot of hard working, honest people who are struggling and people who fell victim to predatory lending, buying houses they were told they could afford when they couldn’t.
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p>These were people taking mortgages when they were told variable rates weren’t going to go up and that, if they did, they could switch fast. All of that was bogus. If that’s bailing out homeowners, moral hazard be damned, then sue me – but make sure you sue the corporations too, because the hazard there (morally and otherwise) is 10 fold. We’re going to be paying back that money – with interest – for the rest of our lives.
if we get party a and b to come together and try to work out a solution to save a family’s house and a company’s profit margin (or from completely losing out on that mortgage)? You could say even doing that much would create the moral hazard that would spur more people on to try to reduce the terms of their agreement, but I doubt it. For one thing, one of the primary means of keeping people in their homes could be adding years to pay their mortgage.
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p>Now, I’m not a math wizard, but while adding years may help a person in the short term, it pretty much means they’ll pay a lot more for the house in the long run. That’s a pretty big disincentive to engage in those discussions, isn’t it? Plus, these families that will have to renegotiate are families that would likely already have been late on payments of all sorts and are quickly destroying their credit – another huge disincentive.
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p>Forcing two sides to come together and have government-mandated arbitration, in the end, sounds like the cheapest way to solve this problem, make sure companies don’t lose everything on a mortgage when someone forecloses and makes sure people stay in their homes. Everyone wins and very little chance of a moral hazard, as I see it. Plus, the ‘bailout’ could be a bandaid rather than the whole enchilada.
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p>I guess that can be a fear, but for the aforementioned reasons (destroyed credit, etc) I don’t think it should be a big fear. Furthermore, is it really a worse scenario than Paulson’s proposal? Nevermind creating the incentive for companies to rid themselves of their bad decision, he’s pretty much giving them the chance to all do it in one fell swoop. The $700 billion isn’t the moral hazard, this entire administration’s economic policies and especially recent decision making has been.
For the most part, when a $100k mortgage is lost, the total loss is just $100k (actually more likely to be about $20-40k). The problem is that people bought the MBS’s with leverage. Which means that they paid maybe $10k for that mortgage. So when they lose $20-40k, they have no money left. Since they borrowed the other $90k to buy the mortgage, somebody else who wasn’t betting on mortgages also loses money.
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p>The other problem is that when investors lose money on bad investments, they have to sell off their good investments to pay for the losses. The losses on the CDO’s and CDS’s are getting to be so huge that the investment banks don’t have enough good assets to sell to make up for the losses. Also, having them sell all of their good assets would potentially lead to a market panic.