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It's Time To Write Down Mortgages



September 22, 2011 – Comments (4) | RELATED TICKERS: SPY

A few years ago the government came up with programs to help the mortgage market without forcing people out of their homes who were under pressure mainly due to falling real estate markets.  That has failed.  It has failed because banks refuse to rewrite loans.  Why?  Because so long as people are paying the loan, the banks look at the short term cash flow versus the likelihood of foreclosure and those costs.  In short, the banks are sucking as much blood as they can out of people.  Now, I'm not taking a moral stand here, it's purely pragmatic.  Most of the banks need the blood.

Right now, we have 8 million homes in or approaching foreclosure.  Tens of millions more underwater.  Millions of those will go to foreclosure in the next few years.  In America, that is a massive weight on aggregate demand and just as importantly, labor mobility.  

The Government needs to adjust the programs they have on loan mitigation.  Very simply, as Yale Professor John Geanakoplos, banks need to be incentivized to write down and refinance mortgages for people who would otherwise qaulify otherwise if Loan To Value were 95%.  The government should offer to pay the banks about 80% of the write down amounts.  They will take that in a heartbeat as they get a cash infusion and a much lower likelihood that the loan will default.  Doing this would be expensive for the nation, but far less expensive than letting the economy teeter along for a minimum of another 5 or 6 years, which is what will otherwise happen based upon the mortgage durations and LTV ratios that are out there.

If we want to make this a pay-go issue, then fine, there are hundreds of billions that we can cut from all sorts of programs, I'd start with defense and tax incentives to energy companies who are about to become even more profitable as we shift to being an energy exporter (yeah, that's happening).  Given the strength of the dollar right now and record low interest rates, the Treasury should simply issue whatever amount of ten year bonds it needs to fund this, and allow the Super Committee to use the cuts to otherwise balance the national budget over the next decade or so.  It looks like we will need about a trillion dollars to undertake a major mortgage write down and bank capitalization program.  Basically one more TARP to alleviate all of the real estate market overhang and give the banks more flexibility to lend.  How can anybody argue it's not worth it?  How can anybody argue it's not moral. 

4 Comments – Post Your Own

#1) On September 22, 2011 at 4:15 PM, davejh23 (< 20) wrote:

Would this apply to only the ~8 million homes in, or approaching, foreclosure?...or would everyone that decided to stop paying their mortgage qualify? 

Why does the plan need to involve making the banks whole?...wouldn't nationalizing the banks and writing off all the crap that's still on their books be cheaper?  Then the nationalized bank(s) could become the primary mortgage lender and hold onto and service the loans...we could then wind down Fannie Mae and Freddie Mac saving us another who-knows-how-many-hundreds-of-billions-of-dollars.

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#2) On September 22, 2011 at 5:01 PM, golofer76 (< 20) wrote:

does anyone know about date?Gardner spoke of it in August..I now have a 50% loss.HELP ANYONE

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#3) On September 23, 2011 at 1:51 PM, leohaas (30.15) wrote:

Nice try. It won't happen.

People will shout: "Why help those 8 million who were irresponsible, and not anyone else?" And then you've got to explain to them that you are not just saving those 8 million, you are saving the system, and therefore everyone in the system.

That arguement will fail to convince many people, just like most still don't get that we would have been in a major depression had it not been for initiatives such as TARP, the stimulus, the bail outs, QE, QE2, and the Twist.

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#4) On September 23, 2011 at 3:06 PM, kirkydu (90.79) wrote:


it ought to be done for anybody underwater who wants to refinance to a lower rate.  The gov'ment is refinancing and they're underwater, why not homeowners?  No, nationalizing would not be cheaper, not by a long shot.  And, at this point, Fannie and Freddie are basically nationalized and being wound down over a few decades.   


I know it won't happen, which is a shame.  The thing is, it's not people who were irresponsible who are left.  The initial wave of foreclosures in 2008-09 were 70% investors who speculated.  Those people are washed out and ironically buying houses as investments again.

Today, it is in fact ma and pa who before they had paycuts and lost jobs could afford the old price.  Today, at lower income, they can't.  It is a major misconception that the people who are left abused the system, the system abused them.  Half of mortgages are underwater, that doesn't happen because people were reckless, it happens because the system collapsed.

Engaging in a program as I and others suggest would stop the slide in property prices in it's tracks, create millions of buyers by virtue of the banks having more capital and jumpstart remodeling and durables.  

If we just let forclosures drag on, rather than getting ahead of the problem, it will be worse for longer.  We ought to just spend the money today, which is going to get drained from the system otherwise anyway, and at least get things done quicker so they can get better sooner.


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