Saturday's Houston Chronicle had an amusing (to perverse readers like your truly, at least) article on the current housing finance crisis, the dirty word "bailout," and how many of the proposals that have been made to "fix" the crisis have a snowball's chance in Hades of either (a) being adopted or, if adopted, (b) actually resolving the crisis. According to the Chronicle the stumbling block to any bailout is simple: "Most risky home loans made near the end of the housing boom can't be salvaged."
"Some people are just in houses that are just way out of reach for
them," said Douglas Elmendorf, a senior economics fellow at the
Brookings Institution, noting that politicians do not like "explicitly
appropriating funds for this."
[...]
Washington's desire to help is undercut by the reality that it's not viable to rescue homeowners or banks that made loans or investors that bought securities backed by mortgages.
"I have sympathy with a lot of the borrowers, but I don't see how you would decide which ones were worthy and which ones weren't," Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said last week, while announcing legislation to crack down on mortgage lending abuses.
When a soft touch like Barney shakes his head at a bailout, you know that it's got to be DOA. On the other hand, Frank's all for closing the barn door after the horses. There's no question that no one (other than the incurably wicked or deranged) wants to see a repeat performance of the unbridled shenanigans that occurred over the last several years in the subprime mortgage market. In that regard, it's likely that some bad legislation will be enacted that will over-correct prior (and no longer persistent) market practices and exacerbate the current credit squeeze by making housing credit tougher to obtain and more expensive for prime, as well as "less than Grade A," borrowers. Trying to fine tune business practices is like trying to fine tune the hot and cold water in your shower. First it's too hot, then too cold, then too hot, then too cold, and on and on until you get it just right. That kind of tinkering is generally best achieved by market participants who've been scalded and/or frozen and are sensitive to all the "nuances." When Congress tries to do it in its usual ham-fisted manner, it generally slams the tap either all the way to "surface of the sun" or to "absolute zero."
Not that such a risk will stop Congress. The taxpayers pay Congressmen and Senators to "do something" and we can't expect them to simply sit on their hands, can we? Especially a well known "hands on" kind of guy like Rep. Frank.
Frank and several consumer groups say lending law reform is needed to prevent mortgage abuses in the future, while Republicans say doing it now makes it harder for the housing market to recover.
Rep. Patrick McHenry, R-N.C., warned at a House hearing Wednesday that Frank's proposed bill would "push us into a housing recession" because lenders would face new restrictions on their ability to help borrowers refinance.
Political pragmatists say there are so many complicated issues at hand and so many interest groups involved that only narrow proposals can muster support.
"Damn the complicated issues! Full speed ahead!"
The final legislation may be more narrow than Frank's "Mortgage Reform and Anti-Predatory Lending Act of 2007" that was submitted last week, but it's likely that we'll get some type of legislation enacted by Congress this year. Whether it will have a negative impact on credit depends on how broad it might be. If it contains a suitability standard (like the "net tangible benefit" in Section 202 of the proposed bill) or the "securitizer liability" in Section 204, I expect that it will negatively impact the availability and cost of credit.
Sheila Bair's proposal of "a chicken in every subprime borrower's pot" comes in for some abbreviated fisking.
Sheila Bair, chair of the Federal Deposit Insurance Corp., argues that mortgage servicing companies should agree to widespread conversions of adjustable-rate loans to fixed-rate loans for borrowers who are current on payments but confront rate resets.
Experts in the $6 trillion market for mortgage-backed securities say Bair's idea won't work because mortgage servicing companies, which collect and distribute loan payments to lenders, have a legal responsibility to modify loans only if they're confident the changes would be successful, says Mark Adelson, a mortgage securitization consultant.
Mr. Adelson must have confused Ms. Bair with someone concerned with the financial well-being of the lenders and servicers that her agency regulates (and insures). As we've previously observed, her primary concern is with a quick fix that appears to help borrowers and the politicians who cater to the downtrodden. The FDIC's new motto: "Legal responsibility? We got your legal responsibility; RIGHT HERE!"
Dick Durbin's Chapter 13 modification and cramdown proposal also gets a cold shoulder.
Some Democrats and consumer advocates want bankruptcy judges to be able to modify loans to keep struggling borrowers from losing their homes. Critics say the idea would keep lenders out of the mortgage market and result in more bankruptcies.
Finally, the always-ready-with-a-quote Bert Ely blows up the idea that Fannie or Freddie can play a part in any "rescue effort."
Finally, some Democrats want Fannie Mae and Freddie Mac to be allowed to expand their mortgage portfolios, creating financial flexibility for investors and lenders to help borrowers refinance. Republicans, however, don't want to do that until the government-sponsored mortgage giants get more oversight in the wake of multibillion-dollar accounting irregularities discovered in recent years.
The federal regulator of Fannie and Freddie agreed to a smaller portfolio cap increase than what Democrats want, arguing that the companies have enough capacity to help the battered mortgage market.
"Fannie and Freddie aren't doing anybody any favors," said Bert Ely, an Alexandria, Va. banking consultant. "They're refinancing people that would be good candidates" for new loans, "no matter what."
That's right, Bert. Neither Fannie nor Freddie is going to make subprime loans, so how, exactly, either is going to affect the subprime credit crisis is a mystery to us all. But it sure sounds like "a plan" when some politician calls for expanded capacity for Freddie and Fannie, doesn't it?
In a world where appearance trumps substance, the "spin" is all that matters.
Everyone is overlooking a very important factor in this crisis. Nothing will work unless the present subprime borrower and future borrower get some vital knowledge on how to manage spending and credit card debt. Clearly, there were abuses by some lenders, but they should not be the only ones who should get the blame. All of the talk of loan modification and refinancing is useless because the borrower will still be like a boat without a paddle when is comes to managing his/her money. I believe that any legislation should also hold the borrower responsible to seek financial literacy guidance before he/she is given any loan. Without this guidance , we will go through this crisis again, even with the protections expressed in the proposed legislation. I must also add, that traditional financial literacy education is not working. The current form of FL education is "memorized, regurgitated , and forgotten"... We need a new and innovative FL delivery system that will help guide everyone as to how to manage their spending, saving, and credit card use.
Posted by: Prof. Samuel D. Bornstein | October 30, 2007 at 08:14 AM
Professor Bornstein, I assume, based upon your comments to the Federal Reserve Board last June that you think that my "Sam Kinison" approach of hiring the homeless to scream "RUN, RUN" at borrowers during a closing is not the FL deliver system of choice, and that something more sophisticated, along the lines of what you've suggested, should be attempted. I'll defer to you.
Posted by: Kevin | October 30, 2007 at 12:35 PM