It's Time To Write Down Mortgages
September 22, 2011
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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.
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