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“The One Housing Solution Left”

April 8, 2008: “A Real Rescue Plan” by Asher Edelman

August 13, 2012: “The One Housing Solution Left: Mass Mortgage Refinancing” by Joseph E. Stiglitz and Mark Zandi

In April of 2008 we put forth a plan to improve the economy through profitable government assistance to homeowners. Today, August 13, 2012, the plan was put forward under different authorship. Regardless of authorship one or another variant of this plan needs to be instituted now.

See below to read the two articles.

A Real Rescue Plan 

By Asher Edelman - April 8, 2008

The current liquidity crisis reveals the urgent need for a bold new idea to save the system. This is no time to be throwing $30 billion at the problem and hoping it will staunch the hemorrhaging, because $30 billion will seem minor when the losses add up to, perhaps, a hundred times that figure.

Here is a straightforward plan that will produce immediate results, even profits, for the federal government and the individuals caught up in the current mess. This plan will not only create liquidity, but will also eliminate financial guesswork. There will be clean balance sheets and no further worries about the hidden investment time bombs that could deepen the crisis. It will be fair and completely voluntary-no mandates, no amnesty for “evil” speculators (the principal will be paid back on most every mortgage). It will generate an income stream for the federal government, and even open a chance to reap substantial profits over time as mortgages are redeemed. People will get to keep their homes! If the present agenda is to find a fair route of stabilizing the whole nation’s finances and not just satisfy constituencies on Wall Street or in Washington, this is a broad-based plan that works from day one and promises substantial rewards well into the future.

Face it, there is no institutional liquidity under the present setup. I define institutions to include banks, insurance companies, hedge funds, investment banks and foreign institutions that do substantial business in the United States. The financial institutions who own mortgage-backed and other junior securities are stuck with them. Even if the assets have value, even if the banks were careful, they are all hedge funds, investment and commercial banks– in the same boat - sub prime paper is illiquid. Shortly, the market for prime securities will become illiquid. Bad debt often drives the future of better debt badly! The Commercial banks are not cut out to rescue this kind of mess. They are too much part of the problem. It is time to discard all concepts of what the bailout total ought to be. What is needed is a window to provide private institutions with liquidity. It is time for the government to get into this business by buying non-liquid, mortgage-backed paper for realistic discounted market prices. Private institutions get their liquidity, and live to fight another day. The speculators will have to “pay” for their bad behavior, realizing their losses, and those who over-borrowed will remain responsible for the principal of every mortgage.

Who can do this? Managed by the executive branch, a federal agency can not only buy these assets, but will also have the option of reducing individual mortgage rates to their original levels. In the end it can profit handsomely as mortgages purchased at a discount can grow to full value with nurturing. The transfer from institutional balance sheets will force the worst of the debt out of private institutions, many of which gauge borrowers with escalated rates that started at 6%, are now creeping past 10%, and, in cases of default, can top 18%. The government can use a combination of the existing institutions, FannieMae and FreddieMac, along with, perhaps, a new vehicle devised to actively move in and out of the market. It ought to be set up under the aegis of the executive branch and, instead of 30,000 Federal bureaucrats, it should be staffed by 100 efficient finance grads under one expert market-maker. Perhaps Goldman Sachs can provide us with yet another leader for this operation.

    The results:

  • * Immediate liquidity in the system.
  • * Speculators realize losses but live to fight again with clean balance sheets.
  • * Homeowners get another chance with less than onerous rates to work towards full payment for their homes. They also get flexibility in timing principal payments.
  • * Government acts even-handedly across the spectrum of needs while earning profits for taxpayers.
  • * Thoughtful long term regulation of these types of investments and the liquidity needs of the system should be evaluated while the system is on the mend.

The One Housing Solution Left: Mass Mortgage Refinancing
By Joseph E. Stiglitz and Mark Zandi - August 12, 2012

More than four million Americans have lost their homes since the housing bubble began bursting six years ago. An additional 3.5 million homeowners are in the foreclosure process or are so delinquent on payments that they will be soon. With 13.5 million homeowners underwater – they owe more than their home is now worth – the odds are high that many millions more will lose their homes.

Housing remains the biggest impediment to economic recovery, yet Washington seems paralyzed. While the Obama administration’s housing policies have fallen short, Mitt Romney hasn’t offered any meaningful new proposals to aid distressed or underwater homeowners.

Late last month, the top regulator overseeing Fannie Mae and Freddie Mac blocked a plan backed by the Obama administration to let the companies forgive some of the mortgage debt owed by stressed homeowners. While half a million homeowners could be helped with a principal writedown, the regulator, Edward J. DeMarco, argued (we believe incorrectly) that helping some homeowners might cause others who are paying on their loans to stop so that they also could get their mortgages reduced.

With principal writedown no longer an option, the government needs to find a new way to facilitate mass mortgage refinancings. With rates at record lows, refinancing would allow homeowners to significantly reduce their monthly payments, freeing up money to spend on other things. A mass refinancing program would work like a potent tax cut.

Refinancing would also significantly reduce the chance of default for underwater homeowners. With fewer losses from past loans burdening their balance sheets, lenders could make more new loans, and communities plagued by mass foreclosures might see relief from blight.

Well over half of all American homeowners with mortgages are paying rates that would appear to make them excellent candidates to refinance. Many of those with stable jobs, good credit scores and even a modest amount of home equity have already done so, taking out 30-year loans at rates around 3.5 percent, some of the lowest rates since the 1950s. But many others can’t refinance because the collapse in house prices has wiped out their home equity.

Senator Jeff Merkley, an Oregon Democrat, has proposed a remedy. Under his plan, called Rebuilding American Homeownership, underwater homeowners who are current on their payments and meet other requirements would have the option to refinance to either lower their monthly payments or pay down their loans and rebuild equity.

A government-financed trust would be used to buy the mortgages of homeowners who had refinanced at an interest rate that was about 2 percentage points more than the record-low Treasury rates at which the government borrows. This would generate enough interest income to cover the costs of any defaults, administration of the trust and other expenses. Families would have three years to refinance; after that, the trust would stop buying loans and eventually wind itself down as homeowners repaid their loans.

Homeowners would see lower mortgage payments and rebuild equity more quickly. Taxpayers would get their money back, with interest, and would gain further as a stronger economy lifted tax revenues. Banks and other mortgage investors would get potentially troubled loans off their books. Some banks won’t like losing the large amounts of interest income they are earning on their current mortgages, but if the refinancing market were working properly these loans would have been refinanced long ago.

If the program was very successful, we envisage that two million outstanding loans could be placed in a Rebuilding American Homeownership trust at its peak. If the average mortgage balance was $150,000, then at the peak there would be $300 billion outstanding.

The federal government could finance the plan directly, through the Federal Housing Administration, or indirectly, through the Federal Home Loan Banks, which offer government-backed credit. Or the Federal Reserve could underwrite the plan; the central bank’s chairman, Ben S. Bernanke, recently talked about the Fed’s doing something akin to the Bank of England’s new Funding for Lending program, which offers incentives to banks to increase lending to households and nonfinancial businesses.

Opponents of additional borrowing or Fed lending will say that a program like this is an unacceptable risk, but the greater risk is to do nothing and let the housing market continue to hold back the economy.

Mr. Merkley’s plan resembles the Obama administration’s Home Affordable Refinance Plan, or HARP, which was designed to help underwater homeowners refinance loans backed by Fannie and Freddie. It has made possible 1.4 million refinancings, far fewer than the goal set in 2009 of 3 million to 4 million. The administration has made some improvements to HARP and proposed others. But the Merkley plan has the potential to go further, reaching the 20 million households with mortgages that aren’t backed by Fannie or Freddie.

The Merkley plan has a successful precedent in the Home Owners’ Loan Corporation, established in 1933. It swept more than a million Americans out of foreclosure and into the long-term, stable mortgages that would become the hallmark of the middle class during the 1950s and ’60s. It’s time to revive this idea.

Since the Great Recession began almost five years ago, housing has been at the heart of our economic woes. If we do nothing, the problem will eventually resolve itself, but only with significant pain and a long wait. Mr. Merkley’s plan would speed the healing.

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Category: Financial, Politics

Comments (2)

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  1. Al says:

    Mr Asher and Mr Zandi-
    While I agree that mass refinancing is an attractive and, in my opinion, reasonable option, the main point I disagree with you on is the stipulation that borrowers must be current on their existing loan. Through my work I have interviewed many homeowners that are at risk of foreclosure and one of the problems that comes up repeatedly is the fact that servicers frequently put impediments to borrowers ever catching up on their delinquencies. One of the most common practices (that I personally would like to see declared illegal for owner occupied properties) is servicers refusing to accept partial payment. What I have seen are families fall behind due to health care expenses, temporary unemployment, or any number of other issues and then their problems are compounded by their servicers not accepting partial payment. The servicers then use this to increase their own profits by charging penalties and interest on the entire past due amount of their mortgage payment rather than whatever portion the homeowner was not able to pay. This refusal to accept partial payment then often causes homeowners to give up even trying to pay their mortgage and then they end up paying off other bills that they may have been able to negotiate payment plans (like health care bills)or may have been better off discharging in a bankruptcy.
    So, in short, I would propose a more generous refinancing program that would allow any homeowner that can show that they have the income to make the new monthly payments on the lower interest loan should be eligible. There have been too many outside factors to only allow people that are current on their loans to make a program that helps people that actually need help.

  2. Asher B. Edelman says:

    My present view (article was written in 2008) is completely in agreement with your view.

    Asher

    P.S. The banks play these same games, to get penalty rates etc, in all of their lending

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