Marketplace

Are we going to nationalize everything…

wait for it…

as a result of several decades of deregulation?!

It’s like trickle-down socialism… first buy up the big investment banks, then the medium national banks, then invest in small businesses, then the individual homeowners.

The irony is staggering, and it all stems from irresponsibility and greed.

I feel like it may be about time for the government to get back to its roots and start governing “for the people, by the people” again.

Eric, Virginia Beach, VA

Sure he can. The problem with the upside-down mortgage is that someone needs to take the loss.

The government could be that someone.

The cost, however, may be in the trillions. Not to mention the outcry from the rest of us.

I think technically, he should be able to, provided Congress continues to sign-off on the funding on his proposed endeavor.

However, there are many open questions:

1) Why should tax payers (or future tax payers) continue to take the loss from stupid lending practice done by banking industry?

2) Is he planning to expand government bureaucracy to handle this new task? Or is he going to delegate this task to banking industry, who originally created this problem?

3) Who will profit from this approach? Possibly both government (or tax payers) and/or banks will take huge losses. This project will benefit ~3% of all home owners who are facing immediate foreclosure. But these are the people who had originally signed on to the loan terms and purchased the homes they could not afford to have to begin with.

Just my 2 cents on this topic…

In an interview on NPR on Monday I heard a similar suggestion. All mortgages (good, bad, and ugly)would be reset to a fixed rate around 5.5% to restore stability in the housing market…not bought by the government but reset by the lending agency. If the value of the house has declined since the original mortgage was obtained, there would be some write-down required by the lending institution (I didn’t even know that term until last summer).

This does not require buying up loans by the federal government, or re-mortgaging homes, but resetting interest rates at current home values. At that point housing-based industry would become stabilized and confidence would support growth, which MIGHT lead to increased housing demand and then an increased in home values again.

The smaller regional banks who have been responsible in lending practices do not have the same issues with subprime lending, but perhaps could get tax credits for any write-downs that they incur as a result of the resetting.

I don’t know if this would work…who knows at this point anyway? It does seem to support that notion that everyone needs support, not just pockets of selected individuals.

Hello, I am back…

I agree with RB that at this point. Who knows what approach would work to revive the housing market and to rescue the economy?

Since RB started with a suggestion, let me provide mine. Going back to Econ 101, the market pricing of an item is determined by the balance of supply and demand. To raise the price of an item, you either need to reduce the supply, or to increase the demand for it.

Then, taking the current 700-billion dollar rescue package into this equation. FED is already deciding to purchase bad loans, or perhaps bad assets already in the water. How about this proposal of removing the physical property off from the realty sales market, for every bad loan that FED acquires? Then, hold the properties for 2 years, until the housing market stablizes, before resale back to the market at a hiher price. This would immediately remove lots of excess housing inventory from the market. Once the housing price decline slows down with this approach, potential property buyers would have less fear to come back into the market. The net result would be better balance of market supply and demand. Market would hence return to normalcy.

The best part is, I am not proposing for any new funding from Congress.

Mike,

Although the details are not out yet, I think the treasury intends to buy securities and not just loans.

These structures are complicated and contain “pieces” of many mortgages. Thus, I do not think it is possible (in the practical sense) to tie any of them to any particular piece of property.

You are correct in saying that it is a simple supply/demand problem. Then, if you want to reduce the supply, “someone” would have to actually buy the houses and take them off the market. This would require new money (although it may be nominally profitable if held long enough). Or we can “wait” until the demand catches up through immigration and/or household formation (which will affect only long term prices).

In any case, either you are willing to use money to drive up prices (if the houses are bought and taken of the market) or you wait for time/inflation to do the same.

I don’t think fixing the rates at 5% or even 4% would make any difference because the problem is the lack of demand for property at “current” prices.

Gerry,

Thank you for your comments. I understand your explanation. I do hope that Treasury will purchase more default loans than bundled mortgage-backed securities or security derivatives.

When Treasury purchases more bad loans, they will be adding liquidity to US large banks, therefore resolving some of this bank liquidity issue that we are seeing right now. But if Treasury decides to purchase security and security derivatives, they will be bailing out investors (many of them are foreign entities). In such case, there will be little benefit to US market situation and economy.

Correct me if I’m wrong, but I thought this was already part of the delightful bailout plan. On today’s Morning Edition, during the “fact-check” segment, it was mentioned that this was one facet of the bailout that could be utilized if deemed necessary. I doubt McCain invented this concept. Maybe he’d better stick to the Blackberry.

Dana,

Although I do not claim to know every detail about the bailout plan, my recollection is that it gives bankruptcy judges some leeway to restructure mortgages. In that case, the lender takes the loss, if any (there are other ways to keep the nominal value the same, like extending the maturity).

What I think McCain means is closing the gap between the value of the house and the mortgage (assuming it is higher) with the government taking the loss.

No matter how you cut it someone needs to take the loss now or wait for inflation to work its magic.

Wow Kai. I panned you for your glib cheerleading on the Bailout Plan, but apparently I understated your glibness.

You ask: “Like I said, and I know Henry Paulson (and his successor) has all kinds of new power, but can he do that?”

That is what the Bailout Plan authorizes, to buy assets. Any assets, at almost any price. Perhaps you should find someone to explain it to you.

Of course, Paulson might need more than $700 billion. Hopefully you enable him to get it!

I think that, ultimately, it would be political suicide if he did.

Imagine two homeowners: one who is making her payments, the other who is in trouble and he’s in default. They each have the same loan and the same interest rate.

If the treasury buys his mortgage and gives him a better rate, imagine how the other other homeowner is going to feel. And they constitute >90% of the constituancy.

Buying the mortgage is one thing. Renegotiating it is quite another.

I’m surprised someone hasn’t called McCain (and Obama, he said something similar) on this one.