On Voluntary Rescues
This post is basically an advice column: I advise that you listen to a recent broadcast of This American Life, a public radio program that generally celebrates the mundane, but recently dipped into the arcane -- an hourlong explanation of the mortgage crisis. Irresistible, right?
The show opens at an awards banquet for Wall Street executives who make mortgages into securities. It closes with investors looking at customer records on a computer screen and talking about a person who fell behind 30 days, then 60, then back to 30, trying to hold on... In between, the stars include a mortgage salesman making $25,000 a month and partying with B-list movie stars, a mortgage executive who had been a bartender the week before, and some truly sketchy types. It's great radio.
I mention this apropos of today's news that the Federal government is close to finalizing its latest voluntary participation plan for lenders who want to help borrowers.
The idea: Mortgage companies would reduce loan balances to match current home values, and the government would refinance the rest of the loan at a more affordable interest rate. Lenders would recoup most of the loan balance, borrowers would have a better chance of staying in their homes and, in theory, the plan would not cost taxpayers, because the money comes from the revenues of Fannie Mae and Freddie Mac.
Representative Barney Frank's Financial Services Committee developed the first version of the plan, which President Bush promised to veto. Now the Senate has developed a second version. The morning papers have all the details (NYT, WSJ).
I've written before about the obstacles confronting any plan that depends on the mortgage industry to voluntarily rescue borrowers. The brief explanation is that mortgage companies and borrowers are not 'in this together.' The companies that decide whether or not to help a borrower may well conclude that a foreclosure is the cheapest and easiest solution to the problem of non-payment.
Also, many mortgage companies are in such disarray that no choice is made. The borrower simply falls into foreclosure because that's the default option.
As you listen to This American Life, relax, kick back and contemplate whether the federal government's various voluntary rescue programs are likely to help.
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Look, it's been proven time and time again that whenever the government interferes with Free Markets, things become worse, not better.
The only incentive for lenders to mark down the value of a mortgage is that they will likely get a higher percentage of the mortgage paid back. Instead of getting 50 cents on the dollar through a foreclosure, they get 85 cents on the dollar by marking down the loan.
Beyond that, what lenders are going to want to continue extending credit when they know that the government could come in and change the rules?
Let the homes fall into foreclosure and let nature takes its course. The Gov't is responsible for these already ridiculous prices (by continuously lowering interest rates), and this newest round of foolishness will only perpetuate unhealthy home price levels.
If you can't afford your home, RENT. I pay MY OWN mortgage, I do NOT need to pay YOURS.
And now the government wants to sue OPEC for high oil prices. Priceless!
Why don't we just change the US from a Democracy (forgetting that we were actually formed as a Republic) to a Socialist country and be done with it.
Fantastic! My tax dollars go to support irresponsible borrowers and partying ex-bartender "mortgage executives"... while I try to figure out if I can "afford something nice". Good job Barney!
I love Massachusetts, but the one reason I would have to get away from here is the politicians!!!
Hilarious comments from the free market fanboys. Yes, let's just trust Wall Street, relitters, and mortgage brokers to fix everything. They've done a great job so far.
In any case, voluntary programs aren't going to catch on. That's because no CEO wants to be the one to declare a voluntary haircut, even if it's smaller than the involuntary kind.
Marcus, you obviously have little understanding of Free Markets. Free Markets would never allow economic imbalances and bubbles to form in the first place.
Free Markets would have allowed Bear Stearns to fail, punishing Wall Street and the financial markets for the excesses of the last 8 years.
Free Markets are about to dish out a world of hurt for over-leveraged American consumers through higher interest rates.
Free Markets are going to cause real estate prices to collapse.
Before going into foreclosure, people might consider doing a "Short Sale" with the lender. If that fails, then the next option would be "Deed In Lieu of Foreclosure" where the deed of the home is handed to the lender and possibly you still walk away.
Dani, I understand the frustration of trying to afford something on your own while some one else over extended themselvs and is being "bailed out" .
But if you look into the details of some of these bailout plans, they are not funded by your tax dollars, they are actully using funds that can create revenue for the state in the way of interest. No less frustrating I know!
"the government would refinance the rest of the loan at a more affordable interest rate."
Marcus, you obviously have little understanding of Free Markets. Free Markets would never allow economic imbalances and bubbles to form in the first place.
There comes a time when a person should immediately stop speaking or typing, and start reading. Start here: http://en.wikipedia.org/wiki/Bubble_%28economics%29, then keep reading, and not typing or speaking, for a long, long time.
The chief reason for the current mortgage "crisis" is government intervention. Twenty years ago, somebody decided that not enough low-income type people were getting approved for loans. Ten years ago, they screamed "RACISM!" and pressured the mortgage companies to stop being so critical of their potential customers.
Presto! Liar's Loans!
Bad credit? Who cares? No income? No sweat! Can't afford the payment on a fixed rate? Try an adjustable rate! Look at how low your monthy payment is, but don't ask about what it will be in five or more years.
Full story here:
http://www.nypost.com/php/pfriendly/print.php?
url=http://www.nypost.com/seven/02052008/postopinion/opedcolumnists/
the_real_scandal_243911.htm
Yes, bubbles happen in pure free markets. And then free markets correct for them. Nearly every time the Government gets involved in "fixing" some percieved injustice in the market, bad things happen (there are some notable exceptions, but the trend is there). The government broke the mortgage industry. I don't want them breaking out the tool belt to fix it.
In general, I dont support bailouts of any kind. The founding fathers did not create this nation to soften business losses.
But this is what the US government does. Ya best get used to the idea.
Yes, let us all just shrug our shoulders as we slouch toward Havana.
No thanks. Some of us still like America enough to try and save her from her government. Just because the government does silly things is no reason to just sit by and let it without at least writing my representatives and telling them what for.
My vote may not mean a lot in Massachusetts, where Commonwealth means what it says, but I still have one, and I'll be darned if I don't use it to effect positive change.
The Community Reinvestment Act only applies to depository institutions--like retail banks--not to the mortgage brokers or lenders chiefly responsible for the worst loans.
The worst subprime derivatives were born in a boardroom at Goldman. The rating agencies just confessed that their own models had software glitches that made them over-rate bad mortgage securities. Lenders trained mortgage brokers to lie about option ARMs on video.
Yes, Greenspan was a fool and Bernanke gave our money to Bear. But much as some people want to delude themselves, this crisis was entirely the fault of the "free market." It's the private sector that has soiled the bed, and now we're all rolling in it.
This blogger might want to review your comment before posting it.
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