Let the government buy the bad mortgages. Its too complicated to try and fix it. Just save the homeowners.
As predicted, this is how they are going to wrap this one up for your consumption. Save the homeowners. Bring back The New Deal. Its a complex problem. The solution is so effiiecent and inexpensive compared to the alternatives. Many economists are already flocking to it as a human, practical, and much cheaper solution than allowing any 
banks to suffer losses.
The problem is that it pegs the financial losses to all holders of US dollars in the most regressive and unjust of all taxes, inflation.
And it fixes nothing, inviting the banks to do it all over again, from the S&L Crisis, to Enron, to IPO bubble, to Subprime and CDO fraud.
This isn't the New Deal. This is the Raw Deal for the public and the Sweetheart Deal for the financial industry.
The only way to resolve this is that any government intervention to resolve this must include:
- Glass-Steagall restrictions on ALL banks doing business in the US including multinationals.
- A significant set of Congressional hearings and the appointment of a special prosecutor assigned to investigate, with FBI support, the pervasive frauds in the US financial industry from Enron to Subprime, with special attention to RICO statutes and individuals as well as corporations.
- A return to the concept of regional and local banks through a reinstatement of laws limiting bank ownership across state lines
- A national usury ceiling for all interest rates and fees on all debt, both revolving and non-revolving, to prevent banks from perpetuating predatory interest rate schemes based on extending individual state laws.
February 24, 2008
Economic View
NY Times
From the New Deal, a Way Out of a Mess
By ALAN S. BLINDER
THE question of the day seems to be this: Are we in, or heading for, a recession? But so much attention is focused on that question that we may be losing sight of an even greater danger: the possibility that powerful headwinds may prevent a strong recovery from any slowdown.
Most of the potential headwinds stem from the housing slump and related financial crises that began — but, unfortunately, did not end — with the subprime mortgage debacle. Wounded financial markets are supposed to cure themselves: asset prices fall, bargain hunters rush in and markets return to normal. But so far, that doesn't seem to be happening much. Instead, house prices keep dropping, the mortgage-foreclosure problem grows and new strains in the financial system keep popping up like a not-very-funny version of Whack-a-Mole.
While the problems are multifaceted, I have several reasons for focusing on just one aspect of the mess: the potential tsunami of home foreclosures. First, it strikes home, literally. Foreclosures throw families — some of whom were victims of deception — into the streets. They erode home values, damage neighborhoods and reduce the values of other properties, thereby intensifying the decline in housing prices that underlies many of our current problems. And they might even cut into consumer spending, which would really throw us into recession.
A second reason is that reducing the wave of foreclosures would mitigate the closely related financial crises in home mortgages and the alphabet soup of financial creations based on them (M.B.S., S.I.V.'s, C.D.O.'s, etc.). If those markets perked up, other beleaguered credit markets probably would, too.
A third reason for focusing on foreclosures is that we've seen this film before. During the Depression, President Franklin D. Roosevelt and Congress dealt with huge impending foreclosures by creating the Home Owners' Loan Corporation. Now, a small but growing group of academics and public figures, including Senator Christopher J. Dodd, Democrat of Connecticut, is calling for the federal government to bring back something like the HOLC. Count me in.
The HOLC was established in June 1933 to help distressed families avert foreclosures by replacing mortgages that were in or near default with new ones that homeowners could afford. It did so by buying old mortgages from banks — most of which were delighted to trade them in for safe government bonds — and then issuing new loans to homeowners. The HOLC financed itself by borrowing from capital markets and the Treasury.
The scale of the operation was impressive. Within two years, the HOLC received about 1.9 million applications from distressed homeowners and granted just over a million new mortgages. (Adjusting only for population growth, the corresponding mortgage figure today would be almost 2.5 million.) Nearly one of every five mortgages in America became owned by the HOLC. Its total lending over its lifetime amounted to $3.5 billion — a colossal sum equal to 5 percent of a year's gross domestic product at the time. (The corresponding figure today would be about $750 billion.)
As a public corporation chartered for a public purpose, the HOLC was a patient and even lenient lender. It tried to keep delinquent borrowers on track with debt counseling, budgeting help and even family meetings. But times were tough in the 1930s, and nearly 20 percent of the HOLC's borrowers defaulted anyway. So the corporation eventually acquired ownership of about 200,000 houses, nearly all of which were sold by 1944. The HOLC closed its books in 1951, or 15 years after its last 1936 mortgage was paid off, with a small profit. It was a heavy lift, but the incredible HOLC lifted it.
Today's lift would be far lighter. And a good thing, too, because our government is far more timid and divided than Roosevelt's.
Contemporary mortgage finance is also vastly more complex. In the 1930s, banks knew all of their customers, and borrowers knew their banks. Today, most mortgages are securitized and sold to buyers who do not know the original borrowers. Then mortgage pools are sliced, diced and tranched into complex derivative instruments that no one understands — and that are owned by banks and funds all over the world.
But this complexity bolsters the case for government intervention rather than undermining it. After all, how do you renegotiate terms of a mortgage when the borrower and the lender don't even know each other's names? This is one reason so few delinquent mortgage loans have been renegotiated to date.
Details matter, so here are a few: First, any new HOLC should refinance only owner-occupied residences. Speculators can fend for themselves — or go into default. Similarly, second homes or vacation homes should be ineligible, as should very expensive real estate. (Precise limits would vary regionally.)
Third, mortgages obtained via misrepresentation by borrowers should be ineligible for HOLC refinancing, but cases of fraud or deception by the lender should be treated generously. Fourth, as the original HOLC found, not all bad mortgages can be turned into good ones. Where families simply can't afford to be owners, the new HOLC should not be asked to perform mortgage alchemy.
What about the operation's scale? Based on current estimates, such an institution might be asked to consider refinancing one million to two million mortgages — proportionately less than half the job of its predecessor, and maybe less than a quarter. If the average mortgage balance was $200,000, the new HOLC might need to borrow and lend as much as $200 billion to $400 billion. The midpoint, $300 billion, is one-seventh the size of Citigroup and would rank the new institution as the sixth-largest bank in the United States.
Given current low interest rates, a new HOLC could borrow cheaply and should find it easy to earn a two-percentage-point spread between borrowing and lending rates, for a gross profit of maybe $4 billion to $8 billion a year.
What about loan losses? A 10 percent loss rate, or $20 billion to $40 billion, spread over the life of the institution, seems incredibly pessimistic. (The original HOLC experienced a 9.6 percent loss rate during the Depression.) So the new HOLC seems likely to turn a profit, just as the old one did. But even if it loses a few billion, we must remember its public purpose: to help the economy recover, not to make a buck. By comparison, the new economic stimulus package has a price tag of $168 billion.
It is said that history never repeats itself. But sometimes there are sequels. Now is the time to re-establish the Incredible HOLC.
Alan S. Blinder is a professor of economics and public affairs at Princeton and former vice chairman of the Federal Reserve. He has advised many Democratic politicians
