Fixing the mortgage meltdown contagion
| By Doc Martin - Dec 11th, 2008 at 2:33 pm EST |
| Also listed in: Evergreen Progressives |
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Categories: Economic Fairness & Security, Consumer and Worker Protection, Property Rights, All Network Posts: Front Page
Categories: Economic Fairness & Security, Consumer and Worker Protection, Property Rights, All Network Posts: Front Page
The head of the Congressional Oversight Panel that is overseeing the TARP program managed by the Treasury is just the latest to point out that the root of the financial problem lies in the residential mortgage market. Companies that service those loans by collecting loan payments from borrowers are not empowered to re-negotiate those loans that are at risk of default because they are not usually the underlying owners of the loan. In fact, a lawsuit has been filed by owners of securitized loans to prevent loan servicing companies from renegotiating those loans because that would require them to write down the value of their loan assets to market value. When the loan owner is a bank or insurance company, a write-down would require them to increase their capital.
There are two potential approached to solving this - one is the carrot: provide loan servicing companies legal protection and some financial incentive to renegotiate mortgages with homeowners so that the loans can be refinanced at realistic market values. The other is the stick: Congress could revert to the legal protections afforded by adopting a bankruptcy law that restores the protections that were stripped away under the Bush Administration revisions done at the behest of the credit card industry.
Either way, the loan would have to be written down, but TARP would provide access to the needed capital to preserve the investors from defaults on their obligations. But the reduced value of the assets would remain far greater than value that would appear after foreclosure and distressed sales, and homeowners would be able to remain in their homes. And the death spiral of declining home values that result from foreclosures could be slowed or stopped.
It was the failure of the Japanese to undertake the required write-downs after the Japanese property bubble burst that dragged the Japanese economy into the gutter for a decade. The US must avoid imitating that error.
The two approaches are not mutually exclusive. Both should be undertaken as rapidly as possible.
There are two potential approached to solving this - one is the carrot: provide loan servicing companies legal protection and some financial incentive to renegotiate mortgages with homeowners so that the loans can be refinanced at realistic market values. The other is the stick: Congress could revert to the legal protections afforded by adopting a bankruptcy law that restores the protections that were stripped away under the Bush Administration revisions done at the behest of the credit card industry.
Either way, the loan would have to be written down, but TARP would provide access to the needed capital to preserve the investors from defaults on their obligations. But the reduced value of the assets would remain far greater than value that would appear after foreclosure and distressed sales, and homeowners would be able to remain in their homes. And the death spiral of declining home values that result from foreclosures could be slowed or stopped.
It was the failure of the Japanese to undertake the required write-downs after the Japanese property bubble burst that dragged the Japanese economy into the gutter for a decade. The US must avoid imitating that error.
The two approaches are not mutually exclusive. Both should be undertaken as rapidly as possible.
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