Posted by
Always To The Right on Wednesday, October 08, 2008 4:11:43 PM
First, lenders already have begun modifiying mortgages, including
principal, and for very good reason. Foreclosures create massive
losses for lenders, and they’re better off keeping owners in their
homes and making payments — even if they take a 10-20% loss on the
principal, on paper. The result will be lower profit than originally
expected, but it’s still profit, and right now that looks a lot better
than a potential 50-75% loss through foreclosure.
Now that Treasury will buy hundreds of billions in mortgage-backed securities, they in effect have become the lender.
They will own the papers on these homes, and must act in the long-term
best interest in managing them. That will mean negotiating with
homeowners just as private lenders have already done, trying to keep
people in their homes and preventing as many defaults as possible.
Note that this comes as a result of the legislation Congress already
passed, and not any new initiative. What McCain proposes is a specific
strategy of managing the paper to prevent as many homes from
foreclosure as possible. In the end, that strategy could result in
considerable long-term profit rather than a taxpayer bath.
Renegotiating the principal on these loans will not directly impact
home values, for two reasons. The action will keep these homes off the market, while home values depend on the sale prices of homes in the immediate vicinity. Second, home values are already
dropping, thanks to the deflation of the housing bubble, excess
inventory through overbuilding of new homes, and the anticipated
addition of tens of thousands of foreclosures. Lenders are also not
writing too many mortgages these days, making it impossible to buy or
sell. If these foreclosures hit the market, it will not only
drastically lower the prices in neighborhoods across America, it will
eat into the ability of lenders to grant mortgages in the future — and
they won’t have Fannie Mae and Freddie Mac backstopping them any longer.
This proposal doesn’t go any farther than Congress has already gone
in injecting the government into private lending markets in order to
undo their disastrous interventions over the past decade. It does
offer a management strategy for the portfolios that Treasury will buy
with that now-existing authority. The plan follows a fairly
straightforward private-sector strategy in an attempt to keep as many
people in their homes as possible. Without some sort of renegotiation
on these loans, we’ll start seeing massive foreclosures and the rapid
deflation of home values everywhere — which is what McCain said he
wanted to prevent.
Update: Michelle strongly disagrees.
Update II: I’ve consulted an economist on this
point, and he points out that the trouble with MBSs is that they
consist of pieces of several loans. That’s what will make
renegotiating terms through the private sector almost impossible — it
will require hundreds of people to agree on each one. He thinks that
McCain’s proposal will create a shortcut that will allow for quick
renegotiation, which could keep many of these mortgages from going into
default.
The McCain campaign confirmed with me that the $300 billion McCain
referenced was part of the existing bailout, not an additional outlay.
He wants it redirected into this effort. I’ve asked for a link, and
I’ll add it when I get it.
As I said, the authority to do this was in the plan all along. It’s
not an additional $300 billion — it’s using $300 billion of the $700
billion already authorized to hit more directly on mortgages rather
than rescuing investors from their derivatives. It transfers at least
some of the pain back to the people who speculated on mortgages, but in
effect gives the derivatives more value through the support of the
mortgages on which they’re based.
Update IV: The Hope for Homeowners program, within the plan passed by Congress a week ago, already has this mechanism within it