As some cynics speculated, the subprime freeze proposal, scheduled to be unveiled early this afternoon, got a considerable push from worries about legislation sponsored by Barney Frank which would have allowed judges in bankruptcy some ability to change mortgage terms in bankruptcy. Note that these proposed rules merely put consumers on the same footing as businesses in the bankruptcy process, and was far from open ended (an article in Credit Slips suggests that the judge could reduce the loan balance to the current market value of the house, and current market rates),
Housing Wire also reports, citing American Banker, that the Bush Administration does not plan to push legislation shielding servicers from investor lawsuits. The lack of protection would presumably make servicers considerably more cautious in approving freezes (although Democrats are considering a law to protect servicers).
This revelations suggest the plan is more cosmetic than substantive, the worst of all possible worlds, setting a terrible legal precedent by abrogating existing agreements while offering little relief.
From Bloomberg:
Treasury Secretary Henry Paulson’s success in crafting agreement on a five-year fix of subprime mortgage rates owes a debt to an unlikely source: congressional Democrats.
Legislation pushed by House Financial Services Committee Chairman Barney Frank that would bypass lenders and investors, giving power to judges to rewrite loans, helped persuade banks and securities-industry lobbyists to sign on to Paulson’s effort, mortgage-industry analysts said.
“The Democrats have given Paulson more leverage and room to maneuver than he otherwise would have had,” said Howard Glaser, a former chief legal adviser to Housing Secretary Andrew Cuomo under President Bill Clinton who now heads Glaser Group, a consulting firm. Paulson could tell lenders and investors “if you go my way, you have some control over the outcome” he said…..
“The threat of Democratic legislation” served to “increase the pressure on the mortgage lenders to strike a deal,” said Michael Barr, a former special assistant to Treasury Secretary Robert Rubin and now professor at University of Michigan law school…..
Martin Feldstein, who served in Ronald Reagan’s White House and currently heads the National Bureau of Economic Research in Cambridge, Massachusetts, said the deal may hurt foreign investment in U.S. securities.
“What are they going to think about investing in American securities in the future if the government can say, well, you thought these were the interest rates and the contract, but we’re going to roll that back now and you’ll just have to settle for less?,” Feldstein said in an interview yesterday.
From Housing Wire:
The second issue in play here is liability — another American Banker story reports:
Servicers are worried that investors may sue if mortgages are modified. Sources said they do not expect the Bush administration to offer any kind of safe harbor from litigation. Instead, the plan will emphasize that the administration believes the modifications are legal under existing pooling and servicing agreements…
“We want to be assured … that they take care of the liability and the tax ramifications of making these broad modifications,” said Erick Gustafson, vice president of government affairs at the Mortgage Bankers Association.
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It’s more Bush spin and PR as that is the sum total of this administration.
The real solution is to double minimum wage and mandate benefits (and yes give corporations yet another a giant tax break as an incentive) so dumb Americans have enough cash to pay their debts and that in turn will restore confidence in the worthless paper and add liquidity to the system. Yes, this is inflationary but what was once “bad” inflation becomes “good” in the right circumstances. A wage increase would also lower foreclosures as almost 80% appear to income/benefit related.
“Note that these proposed rules merely put consumers on the same footing as businesses in the bankruptcy process…”
Nothing scarier than a level playing field, eh?
I’m with Tanta on this: make mortgages on the level with other debt in a Chapter 13 cram-down. The fact that that was given before Congress passed a law in 1978, and that judges still interpreted that law to allow cram-downs of mortgage debt until a Supreme Court ruling in 1993, should be precedent enough. And it would also serve as a regulatory deterent against any future recurrence of predatory or extravagently irresponsible and unrealistic mortgage lending and securitization practices. The slight drawback is that it might somewhat slow the correction of housing prices to affordable levels, though that might also be better macro-economic management of the disaster, and the spectacle of mass bankruptcies might also be a mass enlightenment about our actual political economy, even while acknowledging the equitable credit of those who did not succumb to the frenzy. Dean Baker’s proposal that those whose houses are foreclosed upon be allowed to remain in their former houses at market rental rates would be much more difficult to administer and would probably require a publicly funded trust to transfer ownership, but still is worth thinking about. But any proposal from the Busheviks is bound to be a shit sandwich chased down with piss and vinegar. The only silver lining is that this should be the final nail in the coffin of the “ownership society”.