Government bailouts just loan more money to lenders & borrowers who messed up and are headed towards structural insolvency. You’d have to print money to wipe out debt and induce high inflation & a bigger crash later. Why bother?

The government facilitated market solution is to force all variable rate mortgages above, or resetting above free market fixed rates to convert to fixed free market rates. Waiting for mortgages to be renegotiated or refinanced one at a time will take far to long, and many mortgages are held by entities that can’t renegotiate anyway. There is no point denying marginal borrowers a new fixed market rate, because if they can’t pay more the lenders/investors will lose when they all fold. Far fewer will fold if rates & payments are reasonable. Those who fail at market rates would have folded anyway. Best there be less of them and get past the pain sooner. Lenders/investors will just have to give up the high returns they expected in return for not losing much of their principle. Exotic mortgage paper would, with some repackaging, turn into more stable modest yielding marketable investments. Overzealous or uneducated lenders, investors & borrowers will suffer through some years of pain and emerge a bit wiser.

Henceforth, all new loans would be conservative, fixed rate, adequately documented loans with minimum down payments. Lower rates would be awarded for more money down and better credit. Home equity could only be borrowed for fixed sums at fixed rates, not like a credit card.

We’d learn not to overborrow & overspend. Interest rates on new loans might be a bit high, but after a few years of pain the economy and inflation would stabilize. The alternatives are a crash, or a hyperinflationary bailout and big crash later. Any better ideas? If not, let’s get on with it!

FHA won’t provide financing for anyone with 90 day lates and if the consumer is facing foreclosure they’re already down 120 days….

So who qualifies and who doesn’t?

If you don’t buy my take, I suggest you read Calculated Risk, which has said more than once that the bill will have little impact.

This situation is not even remotely comparable to the one in the Depression. so comparisons to HOLC are misleading. Mortgages in the 1920s were short maturity, typically five years, with high downpayments, typically 50% or more. Even with a very large decline in housing prices, many people still had equity in their homes.

The reason the math worked for HOLC was first, it was implemented AFTER the housing market had hit bottom and AFTER many people had already lost their homes. The weakest borrowers had been flushed out. Second, it could extend maturities from 5 or fewer years to 30, creating a big reduction in payments without affecting principal.

That also happened to match homeownership patterns. People were not as mobile then as now, indeed you often saw homes passed from one generation to the next. How many people under say, 50, expect to own a home for 30 years?

Conversely, extending mortgages from 30 to, say, 50 years would not have much effect on payments (the additional interest substantially offsets the increase in maturity).

Nobody knows what the utilization will be, because nobody knows how far prices will fall.

And re the cost, on the other hand, the bill prior to the tacking on of the Fannie-Freddie bailout provided revenue to cover the CBO’s cost estimate. And the taxpayer’s exposure to Fannie-Freddie is far greater, you must admit, than to the short refi section. That bailout is like extreme life support for a failing patient.

Short refi is not the whole answer to the housing problem, but it is an opportunity to create an island of half a million 30-year fixed and affordable mortgages in a sea of toxicity.

The Home Owners Loan Corp., the New Deal agency which is a first cousin to this proposal, actually turned a small profit for the taxpayer by the time it was liquidated in the early 1950s.

Another supporter, I probably should not cite, is Jamie Dimon.

The CBO’s own cost estimates assume low uptake. That’s why its estimate of the damage is less than $5 billion despite the $300 billion headline number. And I am told the CBO actually does solid analysis based on the provisions of the legislation.

At worst, the bill will let us see whether mortgage holders intend to do anything but stand by and watch the value of the homes fall. Here is an opportunity for them to take 85 cents on the dollar, rather than 50 cents and a raft of hassle.

At best, it puts a floor under prices, good for the market, and supports people with mortgages they can afford. It does not let speculators skate, or help people keep homes they cannot afford.

As for the “vast majority of commentators….,” some who have supported the concept are Nouriel Roubini, PIMCO’s Bill Gross, and EPI’s Robert Kuttner.

Best regards,

Econolicious

People don’t own their mortgages, so they can’t use it as collateral for anything. The lender/investor does.