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Weighing possible bailout plans

Marketplace Staff Oct 31, 2008

Weighing possible bailout plans

Marketplace Staff Oct 31, 2008


Tess Vigeland: Reports this week say a rescue plan is in the works for borrowers who are behind on their mortgages. No official word yet, though.

There are all kinds of ideas floating around about how to get some of the bailout money to individuals, not just banks.

New York Times columnist Joe Nocera has been writing about some of those ideas and Joe, let’s start with the one from investment banker Bill Hambrecht.

Joe Nocera: What he wants is that in return for reducing the mortgage payments for a borrower, the lender gets equity in the house so that at the point at which the house begins to appreciate again, the lender has some appreciation just as the borrower does. So it’s a way to say to the borrower, “Look, you made a bunch of mistakes and you’re going to have to pay a price for that, but you get to stay in the house — you even get to own the house — but you have to give an ownership share of your house to the bank in return for him renegotiating your mortgage and bringing it down to an amount that you can pay.

Vigeland: That assumes then that at some point the home’s value will go up enough for the bank to get back some of that equity when it sells, but what happens if it doesn’t? Or do we even worry about that at this point?

Nocera: Nobody’s got every fine point nailed down here. People have thrown ideas out there that they think will help. But what is the goal here? It is not to save the lender; the goal is to keep people in their homes. Until you stem foreclosures, you will continue to have a financial system in peril because that’s the root cause. All these mortgage-backed securities on Wall Street that everybody’s calling toxic, the reason they’re toxic is because of people foreclosing on Main Street.

Vigeland: Just as a side note, you mentioned the mortgage-backed securities and I think one of the elements that has kept some banks from actually working with borrowers is that they are afraid of getting sued by the folks that hold mortgage-backed securities. Is that dealt with in these plans? I mean, would you basically say “No, you can’t sue?”

Nocera: Well, in my favorite plan, it is dealt with…

Vigeland: That would be the Freedom Recovery Plan, I assume?

Nocera: That would be the Freedom Recovery Plan, and this is from a guy named Daniel Alpert who I’ve gotten to know during the crisis because he’s been very smart. So he sent me this plan and what I like about it is it doesn’t cost the government any money, it inflicts some pain on both borrower and lender so there’s not a moral hazard issue and I actually think it would work on a broad scale. The homeowner has an option: they can keep paying their mortgage or they can walk in to the bank or the lender and hand them the deed and say, “You own the house.” And why would you do that? You would do it for one of two reasons: You’ve got one of those ARMs and you can’t pay the mortgage anymore and you’re drowning and you’re going to be foreclosed on, and the second kind of person who would do this: people with negative equity, people who the value of their homes have gone way down and they put no money down so they don’t have a big equity stake and they’re thinking about just walking away because it’s just not worth it to hold on to that house anymore.

Vigeland: Even if they can technically afford to pay the mortgage?

Nocera: Even if they can technically afford to the mortgage payments. I mean, there are people who are making this economic calculus. So, what does the homeowner get in return for turning in the deed? Under this plan, a law would be passed requiring the lender to accept the deed. They get their collateral so there’s no property rights being violated. However, they have to allow the borrower to stay in the home for up to five years paying rent and then after five years, assuming the homeowner has there you-know-what together and they have enough to make a 10 percent down payment, they can buy the house back.

Vigeland: And if they don’t?

Nocera: Then they have to leave. But they will have stayed in the house for five years, you avoid all those huge foreclosure costs, you avoid the pain of these empty, boarded-up homes driving down everybody else’s property value. You’re not trying to prop up housing prices, but what you are trying to do is create a soft landing.

Vigeland: Let me ask you about one more that you mentioned fairly briefly in a column recently which is the one from Glenn Hubbard and Chris Mayer at Columbia where you would basically take every residential mortgage and re-fi it into a 30-year fixed at an interest rate of 5.25. That sounds really simple.

Nocera: You’re right. The problem with the Hubbard plan, I think, is that it doesn’t create enough pain for the borrower. In other words, you’re basically saying lender has to take all the pain and the borrower has to take none of the pain and that will create resentment in neighborhoods and on streets and in the country at large.

Vigeland: Back to the Freedom Recovery Plan, how likely do you think it is that this kind of rescue would or could even happen?

Nocera: You know, I don’t think it’s terribly likely. It requires the passage of a law that lenders, especially the Wall Street guys, won’t necessarily like. It’s a long shot but the point of the exercise here, the reason I have been putting these plans on my blog, is because I want discussion, even if the discussion ultimately says, “Well, that plan won’t work.” The important thing is, by God, we’ve spent all this time worrying about the banks and worrying about the financial system and I acknowledge that’s important, but nobody is spending the time they need to spend on the root cause, which is home mortgages.

Vigeland: Joe Nocera is a business columnist for The New York Times. Thanks so much for going through these possible solutions with us. Maybe we’ll check in with you in a few months to see what happened.

Nocera: That would be great Tess. Thanks so much.

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