The Missing Piece Of The 'Rescue'
TUESDAY night, John McCain said that he'd spend $300 billion of the $700 billion "rescue" money to try to keep Americans in their homes. That plan isn't as radical as it sounds in the context of the rest of what we've done in the past six months. But it's not a straightforward solution to the mess we're in.
Of course, there is no straightforward solution.
McCain says he'd have the Treasury "immediately buy up the bad home-loan mortgages in America and renegotiate at the new value of those homes, at the diminished value of those homes, and let people make those... payments and stay in their homes." His campaign says the new mortgages would be fixed-rate loans.
Cutting some mortgages down to size is foreordained under the "rescue" law Congress passed last week. The government is going to own lots of these mortgages, anyway. In many cases, the least-cost, most efficient thing to do is to re-negotiate the loans with current owners, starting with the underlying value of the home on which those loans are based.
Where people near foreclosure have the income that gives them the ability to pay a fixed-rate mortgage based on today's home values in their neighborhood rather than values of three years ago, it's likely best for the government to write down the values and refinance the homeowners into new long-term mortgages—so mass foreclosures and re-sales don't turn whole neighborhoods into Section 8 ghettos.
But is it fair? No: This officially repudiates the idea that people, advised by rational financial institutions, can freely enter contracts—with both sides sharing the upside and downside of their decisions.
Another problem: Reworking loans may be the least-cost outcome from one perspective—but, from another, it risks disaster. What of people who aren't close to foreclosure, but still paid too much? McCain's idea could cost far more than even $700 billion; he should be careful in what he promises.
And even on a case-by-case basis, it's not for everyone. Twelve million households now owe more than their homes are worth—so they can't sell if they run into trouble paying the mortgage. And many can't afford any fixed-rate, steady mortgage—even one based on lower home prices.
So, no matter what, lots of people are still going to lose their houses.
McCain's plan suggests something he surely doesn't believe—that owning a home you can't afford is an entitlement. This is an invitation to activists to demand permanent government subsidy of everyone who bought a house these last few years, no matter how foolishly.
And his plan poses a problem with part of the "rescue" idea of having the Treasury (via hired private asset managers) buy these mortgage-related securities, setting a "market" price and eventually selling them at a profit.
A profit isn't the same as something that costs the least. Yes, Washington might make a profit—but that's likely only if the Treasury buys such securities at truly low prices, i.e., at well below half their current values. But financial firms fear that selling at "fire sale" prices would destroy what's left of their capital.
McCain may have determined that earning a profit here is such a longshot that we shouldn't bother worrying about it. But he should say so.
In any case, the central problem is that mortgages are still wrapped up in securities and derivatives that are just inscrutable in their current form. So, to make real progress at solving the crisis, McCain should say that it's foolish to stick to false notions that we can make a "profit" here and set "market" prices for these securities.
Instead, he should have Treasury tell any financial institution wanting taxpayer capital to open its entire portfolio up to independent forensic investigators.
No plan will succeed unless we do the painstaking legwork of untangling this mess—yet it seems that nobody wants to start, instead hoping we can magically assign "market" values to opaque, inconsistently valued assets. This isn't a job for asset managers—but for forensic accountants and private investigators.
The investigators should start going through those institutions' complex mortgage-backed and derivative securities, loan by loan and obligation by obligation. Yes, it will take time. But if we'd started this work six months ago, we might be close to done by now, having the concrete information we need on "toxic" mortgage assets and thus their derivative securities.
Independent forensic investigators should unravel the securities to figure out who's still paying what amounts each month on which mortgages in which markets, as well as assign their best estimates of current property values.
As the feds uncover this information, they should post it on the Internet, loan by loan and risk by risk (blacking out homeowners' and other borrowers' names and specific street addresses). Such clarity will help both the government and private-sector securities owners figure out the true extent of the mess, so that we can start the slow, painful job of recovering from it.
This piece originally appeared in New York Post
This piece originally appeared in New York Post