RSSTreasury Mortgage Fix Plan is a Bad Idea
The specter of two million teaser rate subprime mortgages resetting to higher interest rates next year is a nightmare for the housing, mortgage and investment industries, may push the broader economy into recession and is a personal disaster for hundreds of thousands of homeowners who will lose their home or be forced to constrain the rest of their household budget to keep their home.
As we fix the current problem we need to insure that it will not happen again. But the current plan does not do that. After the huge expenses for the war on terror and Hurricane Katrina, Congress and the President are not willing to finance a $100 billion plus fix like the Resolution Trust Corporation that cleaned up the uncollectible loans caused by similar fraud, naivety and greed during the Savings and Loan mess.
Instead, the biggest bank robbery in the history of the world is being plotted now by Treasury Secretary Paulson, disguised as a solution to the subprime mortgage crisis. The Secretary is twisting the arms of major mortgage holders to get them to “voluntarily” agree to forgo some of the mortgage interest due them as owners of mortgages or of the bonds that finance mortgage pools. All taxpayers paid for the Savings and Loan fix but now bank shareholders and investment firm partners are being asked to pay to fix the mortgage mess.
Yes, they have some responsibility for the mess. To earn big fees and wide spreads over their borrowing costs they gambled that inflation and economic growth would eventually turn bad loans into good loans. And their conspicuous wealth made them an easy target when someone’s pockets needed to be picked.
However satisfying it may be to pick the pockets of Wall Street bankers, it establishes the wrong precedent for the future. Paulson’s plan does not fully recognize that a sizeable share of the problem is due to predatory borrowing. The leaks about the contents of the plan suggest that many predatory borrowers would get to keep their teaser mortgage rates for several more years along with borrowers who intended to repay the loan as contracted but became unable to.
Predatory borrowers inflated their income or assets to obtain a mortgage or agreed to a mortgage payment after the rate reset to the market that they knew they could not pay. It was an offer too good to refuse. Payments cheaper than rent with a possibility that they could end up owning the house. Like the mortgage investors, they gambled and lost.
The reluctance to punish predatory behavior by borrowers equally with predatory behavior by lenders is a political decision. There are far more predatory borrowers than predatory lenders.
The Paulson plan may be rejected by enough mortgage lenders that it contributes very little to reducing the huge number of pending foreclosures next year. If so, this will stretch out the housing recession and the accompanying weakness in the broader economy. Then the ball bounces back to the Congress which will have to make politically painful choices on who to help and who to refuse to help.
