More on the Mortgage Mess
by Linda Beale
As our banking giants engaged more and more in speculation, and as the shadow banking system saw a way to make money off of people’s bad financial decisions by betting against subprime loans, the financial crisis took off. So redressing the problems that caused the crisis shouldn’t overlook mortgages.
The Treasury has now come out with a “plan” for addressing the government sponsored enterprises Fannie and Freddie, which played a role in the crisis though were not the drivers of the subprime origination mess. The plan, Reforming America’s Housing Finance Market: A Report to Congress (Treasury and Housing and Urban Development, Feb. 2011), claims that it will “reform America’s housing finance market to better serve families and function more safely in a world that has changed dramatically.” It also claims that it is intended to limit the government’s primary role to “robust oversight and consumer protection, targeted assistance for low-and moderate-income homeowners and renters, and carefully designed support for market stability and crisis response.”
Both of those claims are worrisome. First, the alternatives proposed seem better designed to serve the financial services industry than famililes. Not only is there still no provision for mortgage modification in bankruptcy, but securitization is intended to “continue to play a major role in housing finance”, even though the securitization process has brought a nightmare of foreclosure mills and uncertainties about who owns debt and has the right to foreclose. While the Administration walks the GOP-favored walk of decreasing government/increasing private markets, it nonetheless leaves government as the one that backstops the private mortgage market, retaining the possibility of private gains and social losses.
Second, the statement that government will be limited to “carefully designed support for market stability and crisis response” means that the government will continue to backstop the securitization losses, as Yves Smith at Naked Capitalism puts it in The 7 Things Really Wrong with the Treasury’s GSE Proposal:
Of the Treasury three proposals, the last is the same as one advanced by the big guns, from the Mortgage Bankers Association, the Fed (both the New York Fed and the Board of Governors), the Financial Services Roundtable and Mark Zandi of Moodys. This alternative preserves too many bad elements of status quo ante, in particular significant and largely hidden subsidies for banks, for anyone to hail it as reform. Although each proposal has some distinctive wrinkles, all call for the creation of “private” entities that would provide insurance to mortgage backed securities that would then be reinsured by the government, with a full faith and credit guarantee.
What is to prevent huge public losses? The proposal relies on a guarantee fee and higher bank capital requirements. This isn’t good enough because it builds too much on the status quo ante. Yves Smith provides her list of the Treasury proposal’s problems:
- The most pressing problems related to the crisis of abuses in the housing securitization markets outside of Fannie and Freddie are still not addressed
- The plan continues to use a poor tool to address housing goals, by focusing on mortgage financing.
- Reliance on the old 30-year fixed rate prepayable mortgage is outdated and fails to address today’s markets.
- Continued use of the private (owners of the entities)/public (backers of the entities debts) structure is fated to suffer the same problems with increasing risk and lobbying as Fannie and Freddie
- This just props up the housing market; it isn’t really a help to consumers.
- The new entities will continue the conflicting roles of the pre-crash Fannie and Freddie of propping up liquidity and making credit decisions.
- There’s nothing to keep these new entities from being too big to fail.
and your solutions are…
i view the treasury’s much anticipated ‘recommnedations’ as more of what they do best…punt to a later date.
Jeff in Indy–
You ask what my solutions are. First and foremost, I would enact a provision that permits modification of all mortgage loans in bankruptcy. (I’ve discussed this various times in postings–these loans are about the only ones that can’t be modified in bankruptcy, and the excuses proffered by the banks for not permitting such modification are extraordinarily self-serving.)
Second, I would phase out the mortgage interest deduction for most Americans over a period of 30 years (the life of a typical mortgage). It might be worthwhile to retain the deduction for those with taxable income (calculated without the deduction) of less than $100,000, so that the ones who are benefiting are clearly the middle class. I’d limit the amount of interest to interest on a mortgage loan of up to $250,000.
Third, I would have no federal guarantee whatsoever of any mortgage loan.
Fourth, I would make securitizations more difficult–probably through a combination of increased regulatory scrutiny, greater transparency for fees charged by banks in connection with securitization (servicing fees, etc. spelled out in very clear, everyday English in offering documents), probably including some restrictions on servicers and on foreclosure practcices.
Fifth, I would add additional bank reforms to ban naked swaps and other casino bets on securitized assets.
Probably other things as well, but that’s my quick list of to dos. I’d want to rethink the low income housing credit, among others to consider.
There is no solution that will fix the problems without a massive reset of the entire political economy. So an agreed upon ‘solution’ is impossible. All ‘solutions’ will be attunated and compromised into non solutions in order to wait in hope things will just work out. I don’t think history is going to allow this to just work out.
after 18 years in mortgage banking i’m still not sure what ‘the’ answer is, but to begin a true conversation is a beginning. i agree w/most of yours: 1. permit, not require, depends on their ability to keep up, 2. since i support the fair-tax concept, i would take the interest deduction away entirely for everyone, 3. absolutely agree, 4. my uneasiness is probably more semantics. ‘make securitizations more difficult…’ sounds like ‘more expensive, hence higher rates’; however, i’m always for more transparency. 5. i’m not sure this necessarily affects the underlying security itself, as much as the institution doing the trading. need to think that through more.
but, before any real discussion can begin the feds need to delineate their policy. no such thing as being a little bit pregnant.
This is so not my bailiwick, but after reading Linda’s post and Yves’ article that Linda links to, it looks to me like Treasury’s main objective is simply to avoid significant further regulation of the mortgage industry and to ensure that the federal government effectively underwrites any massive mortgage-related losses to huge financial institutions.
This is so not my bailiwick, but after reading Linda’s post and Yves’ article that Linda links to, it looks to me like Treasury’s main objective is simply to avoid significant further regulation of the mortgage industry and to ensure that the federal government effectively underwrites any massive mortgage-related losses to huge financial institutions.
This is so not my bailiwick, but after reading Linda’s post and Yves’ article that Linda links to, it looks to me like Treasury’s main objective is simply to avoid significant further regulation of the mortgage industry and to ensure that the federal government effectively underwrites any massive mortgage-related losses to huge financial institutions. Again.
So should I continue to pay BOA and Wells Fargo on loans I think should have been accepted for modification?