Earlier today I came across an article on Time about the controversy surrounding the head of the Federal Housing Financial Administration, the agency that ultimately runs Fannie Mae and Freddie Mac. Ignoring the overblown and hysterical byline of the piece, I gathered that this man's reluctance to embrace reducing the basic principal on loans, specifically loans on underwater mortgages has earned him both staunch detractors and fervent supporters. It should surprise no one in these hyper-partisan times that support lies largely amongst the strongest conservatives while his bitterest foes are progressives who see his stubbornness as the rock grinding down the weakest and most helpless of society.
As anyone who has had the misfortune of exchanging any more than a fleeting greeting knows, I am as pink a liberal as ever had a bleeding heart. And yet, in this case, I support Ed DeMarco wholeheartedly. I understand where the progressive angst is coming from, and also the practical logic of the arguments in favor of loan forgiveness - in many, if not all, cases foreclosure is a more expensive option than writing off a portion of the principal to match market value. But DeMarco is entrusted with public funds and his first responsibility is to his stakeholders, the taxpayers; he would be remiss in betting big, with their funds. on an unproven theory. Perhaps this strategy will lead to lower losses over time; it also may not, especially if too many borrowers and homeowners default on their loans to gain advantage. That would not only lead to greater losses, but may well tip the economy back into turmoil.
More critically, I disagree with the very idea that assistance should be directed at those on the verge of financial implosion. Apart from the fairness factor - is it really fair on the rest of the homeowners to soldier on with their loans while a small minority gets a bailout (and doesn't that simply create an incentive for people to default on loans even if they could scrape by) - I simply don't believe that this is a wise use of scarce funds. People about to default on their home loans have a lot of related problems. In fact since the majority would have struggled to keep their homes even in the face of adversity, it's likely that they will have run up other debts; or they have been pushed to bankruptcy by loss of jobs or medical bills. Simply reducing their one obligation, and that too reducing but not removing it entirely, will not lift too many of them out of their dire straits. And the loss of their credit worthiness will further impact them.
Rather I would suggest that money be directed towards any and every borrower, and not just those on Freddie and Fannie loans, towards reduction of their principals. This may sound like an even larger bailout, but in fact there is a crucial caveat. Two actually. One, the funds do not come out of FHFA coffers - their loans remain intact, and instead Congress use TARP funds or other sources (I hear the Federal Reserve has virtually unlimited dollars for select customers) to finance this. And secondly, the money advanced to the homeowners is a loan not a bailout. A generous loan to be sure - the borrower gets a low interest, long term loan that covers the difference between what is owed on the property and what that property is currently worth, and can therefore payoff enough of the principal to bring the house back above water. This would free one up to refinance to better rates, or sell if one so desires, without taking a hit on one's credit score. However, and this addresses the fairness of a bailout, the borrower still owes that money to the government - this would actually be a lot "fairer" than the sweetheart deals offered to the banks and Wall Street firms.
There are several further refinements I would suggest. Firstly, the private banks get only ninety percent of the loan back - they have to take a minimum ten percent write-off on their loans, in return for being able to take all those underwater assets off their books and turn them back into negotiable instruments (ten percent is just a general number I threw out there, it could be fifteen or twenty percent). However, the borrower still owes the government the full amount of the loan - that is the price of being able to keep one's credit history clean and be released from the weight of an underwater mortgage. As an example, if a person bought a house for $250, 000, and it's worth only $150,000 today, the government would advance a loan of $100,000. The bank would get only $90,000, but the homeowner would still have to repay the full $100,000. Now, if the home appreciates in value, the borrower may be able to pay off the government early using the equity in the property. But should that owner sell the house, he or she still owes the government their money. The borrower has a choice of wrapping his federal loan into any new housing loan, thus allowing the government to recover its money faster.
The term of these loans should be set to a sufficient length, such as 20 or 30 years, and be strictly principal plus interest - no fancy interest only loans allowed here.n addition, I would suggest that the loans be advanced mainly to people with good credit and a strong history of payment. This is the exact opposite of the attempts to bail out the housing market to date - and I would suggest that the efforts so far have failed precisely because they've been focused on people who cannot really gain much advantage from that assistance, when they are struggling with a plethora of problems. This is a straight forward loan and as such should follow the basic principles of lending - people with proven income and a history of responsible behavior get their loans. The resulting recovery in the housing market may actually help even those in deeper problems, if nothing else by raising property values again. I imagine that if this were successfully implemented, private equity would also flow into the market, offering similar loans with different structuring and negotiating different settlements with the original lenders. But the key is to get the housing market moving again, and releasing approximately ten million homeowners from a millstone that constrains mobility and freedom to innovate.
The government should not and cannot afford to be in the bailout of such vast numbers of its population. But it can, and should be able to step in when private capital freezes, to leverage its unique power of the purse for the common good, not as a bail out, but as a helping hand to help people back on their feet, rewarding those who act in good faith above those who didn't. We have a government not just of and by the people, but critically also for the people. Not just those at the top and not just those about to sink below for the third time, but for all the people.
DISCLAIMER: I suppose one is due here - the ideal homeowner of strong credit history and responsible borrowing habits, yet still possessed of an underwater property, as described in my post would be I, and this program is developed to get me out of my current mortgage.
As anyone who has had the misfortune of exchanging any more than a fleeting greeting knows, I am as pink a liberal as ever had a bleeding heart. And yet, in this case, I support Ed DeMarco wholeheartedly. I understand where the progressive angst is coming from, and also the practical logic of the arguments in favor of loan forgiveness - in many, if not all, cases foreclosure is a more expensive option than writing off a portion of the principal to match market value. But DeMarco is entrusted with public funds and his first responsibility is to his stakeholders, the taxpayers; he would be remiss in betting big, with their funds. on an unproven theory. Perhaps this strategy will lead to lower losses over time; it also may not, especially if too many borrowers and homeowners default on their loans to gain advantage. That would not only lead to greater losses, but may well tip the economy back into turmoil.
More critically, I disagree with the very idea that assistance should be directed at those on the verge of financial implosion. Apart from the fairness factor - is it really fair on the rest of the homeowners to soldier on with their loans while a small minority gets a bailout (and doesn't that simply create an incentive for people to default on loans even if they could scrape by) - I simply don't believe that this is a wise use of scarce funds. People about to default on their home loans have a lot of related problems. In fact since the majority would have struggled to keep their homes even in the face of adversity, it's likely that they will have run up other debts; or they have been pushed to bankruptcy by loss of jobs or medical bills. Simply reducing their one obligation, and that too reducing but not removing it entirely, will not lift too many of them out of their dire straits. And the loss of their credit worthiness will further impact them.
Rather I would suggest that money be directed towards any and every borrower, and not just those on Freddie and Fannie loans, towards reduction of their principals. This may sound like an even larger bailout, but in fact there is a crucial caveat. Two actually. One, the funds do not come out of FHFA coffers - their loans remain intact, and instead Congress use TARP funds or other sources (I hear the Federal Reserve has virtually unlimited dollars for select customers) to finance this. And secondly, the money advanced to the homeowners is a loan not a bailout. A generous loan to be sure - the borrower gets a low interest, long term loan that covers the difference between what is owed on the property and what that property is currently worth, and can therefore payoff enough of the principal to bring the house back above water. This would free one up to refinance to better rates, or sell if one so desires, without taking a hit on one's credit score. However, and this addresses the fairness of a bailout, the borrower still owes that money to the government - this would actually be a lot "fairer" than the sweetheart deals offered to the banks and Wall Street firms.
There are several further refinements I would suggest. Firstly, the private banks get only ninety percent of the loan back - they have to take a minimum ten percent write-off on their loans, in return for being able to take all those underwater assets off their books and turn them back into negotiable instruments (ten percent is just a general number I threw out there, it could be fifteen or twenty percent). However, the borrower still owes the government the full amount of the loan - that is the price of being able to keep one's credit history clean and be released from the weight of an underwater mortgage. As an example, if a person bought a house for $250, 000, and it's worth only $150,000 today, the government would advance a loan of $100,000. The bank would get only $90,000, but the homeowner would still have to repay the full $100,000. Now, if the home appreciates in value, the borrower may be able to pay off the government early using the equity in the property. But should that owner sell the house, he or she still owes the government their money. The borrower has a choice of wrapping his federal loan into any new housing loan, thus allowing the government to recover its money faster.
The term of these loans should be set to a sufficient length, such as 20 or 30 years, and be strictly principal plus interest - no fancy interest only loans allowed here.n addition, I would suggest that the loans be advanced mainly to people with good credit and a strong history of payment. This is the exact opposite of the attempts to bail out the housing market to date - and I would suggest that the efforts so far have failed precisely because they've been focused on people who cannot really gain much advantage from that assistance, when they are struggling with a plethora of problems. This is a straight forward loan and as such should follow the basic principles of lending - people with proven income and a history of responsible behavior get their loans. The resulting recovery in the housing market may actually help even those in deeper problems, if nothing else by raising property values again. I imagine that if this were successfully implemented, private equity would also flow into the market, offering similar loans with different structuring and negotiating different settlements with the original lenders. But the key is to get the housing market moving again, and releasing approximately ten million homeowners from a millstone that constrains mobility and freedom to innovate.
The government should not and cannot afford to be in the bailout of such vast numbers of its population. But it can, and should be able to step in when private capital freezes, to leverage its unique power of the purse for the common good, not as a bail out, but as a helping hand to help people back on their feet, rewarding those who act in good faith above those who didn't. We have a government not just of and by the people, but critically also for the people. Not just those at the top and not just those about to sink below for the third time, but for all the people.
DISCLAIMER: I suppose one is due here - the ideal homeowner of strong credit history and responsible borrowing habits, yet still possessed of an underwater property, as described in my post would be I, and this program is developed to get me out of my current mortgage.
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