Sep 24th, 2008 at 9:26 am
Fixing the Mortgage Market
Here’s our economic policy team’s video on what the need for a bailout to include provisions to restructure the mortgages that underlie the bad mortgage-backed securities. That should (a) help people stay in their homes, and (b) ensure that taxpayers get some value for any assets that we buy:
31 Responses to “Fixing the Mortgage Market”
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September 24th, 2008 at 9:37 am
Problem is this plan does nothing to help stabilize the markets. Even Warren Buffet has come out in favor of the Paulson plan and says it needs to be done now.
September 24th, 2008 at 9:40 am
The only criticism I would make on an initial viewing is to remind viewers that the Treasury Secretary has no “plan” — he has a demand for an operating budget and a demand for authority. That’s it.
There is no plan. There’s talk of what he could do, but there’s no “plan” in any terms which people would normally use the word.
September 24th, 2008 at 9:49 am
I think the devil in the details on point one. Just how the hell do you put these mortgages back together? It would take an enormous amount of time and effort, the former of which we don’t have.
The rest is fine…although I don’t know how restructuring a person’s mortgage stabilizes the market. If credit is unavailable no one buys…hence prices keep falling.
A word on the Republicans…It is beyond absurd to hear them speak about tax cuts at a time like this. Tax cuts don’t do anything when the financial system has totally collapsed. Yesterday’s hearing was a disgrace…and today’s hearing is going to be even more of a charade. Hearing car salesman trying to figure out the most simple pieces of economics is like watching a train wreck in slow motion.
If there’s a black hole in Washington it’s economics and finance.
September 24th, 2008 at 10:08 am
Seems to me that credit begins to flow because 1) people now know what the mortgages are worth, and 2) people aren’t defaulting on their mortgages. Credit has tighted because of ambiguity re: the value of mortgages in part driven by increased foreclosures. Address those issues, and lenders have the information they need to feel comfortable about lending.
September 24th, 2008 at 10:14 am
Looks like I’m not the only one still stunned that people can use the word “plan” to describe the back-of-the-deposit-slip money demand from Lord Chancellor Paulson.
Here’s the Krug-man himself:
It’s not an accident that the “Paulson plan” reads like a ransom note. It was intentional.
Krugman’s illustration, by the way, is the photo of Colin Powell waving around his vial of seasoning salt, er, anthrax, at the UN telling us we gots to go to war naw or we all gonna die…
September 24th, 2008 at 10:15 am
I agree with Ed Smithe – it seems like it would be really hard (and also system-game-able) to put mortgages back together again. Why not buy foreclosed houses?
A. There still is a housing market, so you could get close to the right price, and you inject some money
B. As in the CAP plan, you can turn around and remortgage the house to the original owners.
September 24th, 2008 at 10:16 am
You continually reference “Helping people stay in their homes” as something that should be explicit government priority in this crisis. I might have missed it, but if you could post something fully explaining your rationale for why this is necessary it would be great.
I guess I would also like to see information on how many people are being forced out of their homes and what those people look like socio-economically (can they afford to rent a smaller place? What are there other options?) before I would look to large efforts to subsidize a lot of bad decision making.
To me it seems like many home buyers overextended themselves and may have to suffer some negative consequences. Why should they be bailed out without repercussion?
September 24th, 2008 at 10:34 am
I’m skeptical of proposals that we help people “stay in their homes.” If people are seriously underwater on their mortgages, it’s probably best for everyone involved to walk away and simply write off the mortgage as “failed.” The focus should be on getting the houses back on the market and resold at the market price.
September 24th, 2008 at 10:38 am
p.e.,
I think the question then becomes what do you do with those houses? The former owner will probably not be able to afford the house, and anyone else will just wait until the whole thing unravels.
I agree that the foreclosures are a huge problem, but I think that shoring up the financial system is what we have to concentrate on. If that collapses then businesses collapse and people lose their jobs. That will increase foreclosures and drag the system down even further. We can work on helping folks keep their houses as the financial system stabilizes.
September 24th, 2008 at 10:43 am
I think that is the reason the bail out figure is set so much higher than the gap between the bad mortgage nominal value and true value. The government will need to buy a lot of good debt just to seperate out the bad debt.
I’m thinking this just won’t work. I just don’t see the army of Humpty Dumpties being put back together without the government completely seizing nearly all mortgage backed securities.
Genuinely insolvent entities will not go for a bailout. Currently, they have 2 choices: declare bankruptcy or hide their true lack of value and hope that their assets increase in worth. There is no risk and only reward for delaying. How does a bail out change things for them? If they take the government money and only manage to dupe the government into paying a little too much, they’re still bankrupt, but no longer have a mystery asset they can use to hide their true worthlessness. If they keep the bad securities, they get to keep delaying and hoping for a miracle.
September 24th, 2008 at 10:49 am
I agree with the person above. Unless you can explain how to undo all of the securitizations, this is just not a serious plan.
September 24th, 2008 at 10:53 am
the Treasury Secretary has no “plan” — he has a demand for an operating budget and a demand for authority.
Exactly. And the simplest explanation for that is that the Administration doesn’t have a clue what to do about this crisis. Give them a huge pile of money and unlimited authority, and they’ll try to figure something out.
If people are seriously underwater on their mortgages, it’s probably best for everyone involved to walk away and simply write off the mortgage as “failed.” The focus should be on getting the houses back on the market and resold at the market price.
The problem with that is that too many people are underwater with their mortgages. Your solution doesn’t scale up well, if it ends up with millions of people homeless and millions of empty homes.
If you’re going to evict the homeowner, resell the home at greatly reduced price, and let the bank take the hit for the difference, why not just renegotiate the mortgage?
September 24th, 2008 at 10:54 am
When the housing market is good, banks can afford to toss people out and sell to a buyer who can pay. That isn’t the case now. They aren’t throwing you out of the house you paid $400,000 for and selling it to someone else for $400,000. They are throwing you out and selling it for $300,000.
Everytime the bank does that, it lowers the value of all of the other houses that are security for other loans they made.
The bank would be better off if it renegotiated your mortgage. If you owe them $400,000 that you can’t pay, and they can only get $300,000 for the asset, somewhere in between is a number that makes you and the bank better off.
That doesn’t apply to all defaulters. People who got interest only ARMs assuming the home value would always increase more than the interest are toast.
September 24th, 2008 at 10:58 am
I third the notion…Njorl knows more about this than I probably do.
As my father told me the this morning, the best way to find the holders of all of this debt (to put it back together) is to not pay the interest. By then, it will be too late.
A word on CAP and the rest of the think tanks in town. I mean, how MIA are they on all of this? Some of the best minds (at least that’s what they tell their donors) are supposedly at Heritage Foundation, CAP, Brookings, AEI and they don’t have a collective clue what to do.
As I said before, DC is a black hole when it comes to economics and finance. We should have kept the capital of this country in NYC. Equal corruption, perhaps equal waste, much much much better minds.
September 24th, 2008 at 12:01 pm
Err Step 1 is not possible. You guys need to learn a little bit about securitizations. You can’t take the mortgages away from the SIV without the approval of the bondholders and since 75% of them will be non-American I doubt that a consent will be forthcoming. Why would the non-American bondholders (even the Americans for that matter) agree to give up the sole source of income for the SIV? Will you repay their principal? With interest? If so, you’ve got a deal, but where is the money coming from?
September 24th, 2008 at 12:04 pm
All,
there seems to be agreement that de-securitizing mortgage-backed securities is hard, so, I reiterate, let’s buy houses.
Ed Smithe said,
It’s a good question. As I think this through, a couple of features come out. When you buy the foreclosed/ing house, you get a discount off the purchase price. Maybe the old owners can afford the lower price. Maybe a 30 year fixed rate mortgage will work where their ARM didn’t. A subset of deserving folks could get better-than-market mortgage terms. Alternatively, the government could rent them out, or sell the rights to rent them. Last, the government can wait until this thing unravels, which is to say that uncle sam can stay solvent longer than the market can stay irrational.
As far as I can tell (which admittedly isn’t far), the problem is that people aren’t able to pay their mortgages, which means they foreclose, which means the banks own a house instead of money, which means they can’t pay off the securities, which means the securities aren’t worth their face value, but we can’t figure out what they’re worth, so the companies are stuck with all these assets they can’t sell.
I assume that these securities have some provision for payouts when houses get sold or foreclosed at a loss, which means that your cash would ‘trickle up’ through the system.
What do you think about that?
-p.e.
September 24th, 2008 at 2:26 pm
p.e.,
I still have to stick to a strategy of getting this bad paper out of the system. The system has to work before we start asking people to buy homes again (foreclosed or otherwise).
The reason why these companies are stuck with these assets is because we haven’t found a floor yet. Hopefully, Uncle Sam can provide that floor.
Kramer over at CNBC had a really good column on the true and false over this plan…Check it out if you have a chance:
http://www.cnbc.com/id/26857498
Good discussion though. I’m glad to see that today’s forum has a bunch of people that may not be of the same ideological stripe (I’m a Conservative), agreeing (for the most part) on what’s the best course for our nation. Obviously, we can’t just simply let this thing collapse without trying some significant intervention. Any “republican” that suggests otherwise obviously doesn’t understand economics, or the depth of this problem.
While I’ve been harsh in my criticism of the President (Domestic and Foreign Policy)…His going on television (at least he’s thinking about it) to lay this out might be one of the most important actions of his entire administration.
September 24th, 2008 at 2:32 pm
No. Fuck that noise. Stabilizing house prices only slows the deflation of an asset bubble that is putting a drag on the economy.
And paying off mortgages for those who cannot afford them pretty much fucks those who didn’t borrow more than can afford. If housing prices kept going up, you wouldn’t hear a peep.
I lost $800 on Enron stock. Where’s my bailout?
September 24th, 2008 at 5:07 pm
Ed Smithe
In the most truthful and honest and non-snide way, I don’t understand how buying assets backed by mortgages makes the mortgages less likely to foreclose. I can’t get my head wrapped around it.
It sounds like your point about buying the securities is that it’s straightforward and fast, but I’m nervous that the gov’t will buy the mortgage backed securities, companies will take the money, and then no one will want the securities from the gov’t, and since there’s no market in the securities now, odds are the payout from the securities will be less than what the fed bought them for.
JAMEY
I’m not stablizing house prices, and Paulson plan won’t either. Fed buying raises prices on the demand side, Fed selling lowers prices on the supply side. Now, the Fed could take some of those homes off the market, and manipulate it like that, but it doesn’t seem like a good idea.
The expectation for the Paulson plan seems to be that the fed will overpay for some stuff, then sell it back to someone at a loss, so this is stimulus. The question is, who gets it?
Sorry about your stock loss, but I have to think that stocks as an asset class are different from personal houses because houses have the benefit of tying people into communities.
September 24th, 2008 at 8:58 pm
To me it seems like many home buyers overextended themselves and may have to suffer some negative consequences. Why should they be bailed out without repercussion?
Some here, such as the commenter quoted, seem to have lost the ability to compare costs with benefits. Yes, we understand the concept of moral hazard. Yes, we understand that the universe winces at the cosmic injustice being inflicted upon you when a subprime borrower gets a loan modification into an affordable prime rate while are left alone, shouldering the unmitigated loss on your WaMu stock. We get it. But a decision of national scope requires comparing costs and benefits and assessing who the winners and losers should be. As a matter of national economic health, any plan that will actually succeed at unfreezing credit must restore the market’s ability to objectively value mortgage-backed securities. If that doesn’t happen, nobody has any confidence in anybody else’s balance sheets containing if it contains the letters “RMBS” on it, and no lending takes place. The best way to restore objective valuation on these mortgages is to modify them en masse so that they don’t contain all the exotic and unpredictable garbage invented by the lending industry the past several years. They need to be modified to contain traditional loan terms, made in conformance with traditional underwriting standards because we know how to value those. To make them perform, they sometimes will need to be written down in principal and interest rate. This will actually save the government money, because the loss rates on foreclosures are less than the loss rates on modified loans, meaning taxpayers will get a better return for buying these assets.
Now yes, this means that some families lead by people you believe are less financially sophisticated and less well-insulated from disaster than you will not be punished with cliff-dives into deeper poverty, despite their obvious unworthiness to pay reasonable costs for housing. Come to terms with this and quit acting like a bunch of fucking babies when distressed homeowners finally catch a break. Remain content that if government does the right thing here, you can continue to gloat and feel self-righteous about the incredible largess afforded homeowners paying 70% of their income on ARM reset mortgages. Or, you could save your outrage for excess executive pay for failed management propped up by taxpayers, an actual manifest injustice that is totally unnecessary to a succesful plan.
September 24th, 2008 at 9:02 pm
This will actually save the government money, because the loss rates on foreclosures are less than the loss rates on modified loans, meaning taxpayers will get a better return for buying these assets.
Sorry, that should say the loss rates are higher for foreclosures than for mods. Post written hastily.
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