Workouts – and not that kind….
by Tom on August 17, 2007
in Uncategorized
Hi all,
I’m going to end this week worth of commentary on the markets and links to other commentary with a piece by Paul Krugman (you can find it here) but I’m copying the whole thing.
I like it for two reasons:
1. It doesn’t let the people on Wall St. who packaged some of these “toxic” loans off the hook. The way that I look at it, if you expect to earn outrageous sums of money investing in unique products like subprime mortgage backed securities, then you need to take the risk, especially when you borrow the money to buy the borrowed money. We didn’t bail out Enron or World Com, and we shouldn’t bail out places like American Home Finance, Novastar, Countrywide etc.
2. It brings up the other side of the story. There are borrowers out there who made stupid choices, there are borrowers out there who were talked into buying a larger house than they should have by a slimy agent and slimier broker who made it too easy and there are borrowers out there who took out a bad loan and gambled with it. Either way, there are a lot of people who are hurting because of the mortgage mess that’s going on. “We” should see if it’s possible to set up a way to work out things so that some (but not all) of the people who have those loans can keep their homes. Lower the rate, put payment caps in, allow them to take longer to pay them back, something like that. If we can keep even 20% of the impending foreclosures from happening, we’d all be better off.
Here’s the article, have a good weekend, we’ll talk to you on Monday!
Paul Krugman: Workouts, Not Bailout
Paul Krugman has a proposal to deal with the consequences of the mortgage market meltdown:
Workouts, Not Bailouts, by Paul Krugman, Commentary, NY Times: …According to data released yesterday, both housing starts and applications for building permits have fallen to their lowest levels in a decade, showing that home construction is still in free fall. And if historical relationships are any guide, home prices are still way too high. The housing slump will probably be with us for years, not months.
Meanwhile, it’s becoming clear that the mortgage problem is anything but contained. … Many on Wall Street are clamoring for a bailout — for Fannie Mae or the Federal Reserve or someone to step in and buy mortgage-backed securities from troubled hedge funds. But that would be like having the taxpayers bail out Enron or WorldCom when they went bust — it would be saving bad actors from the consequences of their misdeeds.
For it is becoming increasingly clear that the real-estate bubble of recent years, like the stock bubble of the late 1990s, both caused and was fed by widespread malfeasance. Rating agencies like Moody’s Investors Service … seem to have played a similar role to that played by complaisant accountants in the corporate scandals of a few years ago. In the ’90s, accountants certified dubious earning statements; in this decade, rating agencies declared dubious mortgage-backed securities to be highest-quality, AAA assets.
Yet our desire to avoid letting bad actors off the hook shouldn’t prevent us from doing the right thing, both morally and in economic terms, for borrowers who were victims of the bubble.
Most of the proposals I’ve seen … are of the locking-the-barn-door-after-the-horse-is-gone variety: they would … have been very useful three years ago — but they wouldn’t help much now. What we need at this point is a policy to deal with the consequences of the housing bust.
Consider a borrower who can’t meet his or her mortgage payments and is facing foreclosure. In the past, … the bank that made the loan would often have been willing to offer a workout, modifying the loan’s terms to make it affordable, because what the borrower was able to pay would be worth more to the bank than its incurring the costs of foreclosure and trying to resell the home. That would have been especially likely in the face of a depressed housing market.
Today, however, the … mortgage was bundled with others and sold to investment banks, who in turn sliced and diced the claims to produce artificial assets that Moody’s or Standard & Poor’s were willing to classify as AAA. And the result is that there’s nobody to deal with.
This looks to me like a clear case for government intervention: there’s a serious market failure, and fixing that failure could greatly help thousands, maybe hundreds of thousands, of Americans. The federal government shouldn’t be providing bailouts, but it should be helping to arrange workouts. …
The mechanics … would need a lot of work, from lawyers as well as financial experts. My guess is that it would involve federal agencies buying mortgages — not the securities conjured up from these mortgages, but the original loans — at a steep discount, then renegotiating the terms. But I’m happy to listen to better ideas.
The point, however, is that doing nothing isn’t the only alternative to letting the parties who got us into this mess off the hook. Say no to bailouts — but let’s help borrowers work things out
