Homeowner Bailout Update

The evening news last night reported that current Japanese PM Taro Aso is pushing a plan to put 20 billion dollars directly into the hands of citizens, regardless of income or tax status.

There is also a plan afoot to shore up banking balance sheets. It seems to be built along the lines of the initial Paulson plan -- government entity to buy up toxic-affected shares, delivering cash in return. No debate over the question of an equity share, but the contemplated scale seems to be smaller that the US bailout, at this point at least.

The cash-to-citizens plan is being criticised by the opposition parties as a cynical ploy to buy off the electorate in advance of a snap election. That certainly fits the style of the PM and of the LDP, and the timing (Aso wants the payout to take place before the end of the year, and remaining term of the current PM office ends in the middle of next year, so will-ye nil-ye, the window for a voluntary election is early next year).

As to helping distressed mortgage holders, what seems to make sense to Washington bureaucrats (even well-intentioned ones) and what will actually work on the ground may be two very different things. Don't get excited until the details are clear and the implementation is proven

My bad. Turns out they are planning to use 50B from the bailout plan to guarantee 500B of mortgage loans. See msnbc link (no registration required): http://www.msnbc.msn.com/id/27441061/

I agree with "rational" and "bombIran". Like the latter I'm renting too, because I made a conscious decision that the housing market in my area had gotten too frothy. I've paid a price for that in having to put up with multi-family living units, etc. so why on Earth should I now be asked to foot the bill for people who bought more home than they could afford?

To frame it in another way, there are many houses in my area that were the target of bidding wars, i.e. multiple people (even 15-20 in some cases) making offers. Imagine that a "winner" in one of these bidding wars now getting tax subsidies from the 14-19 lower bidders and everyone else in the country in order to back up the bid that he wasn't actually "good for" when he made it.

Why is this fair? This isn't about someone who doesn't have enough to eat, etc., it's about someone who paid too much money for something that was available in other cheaper forms (i.e. by renting like I do).

The banks should restructure the loans of their own accord. They're going to lose a lot more money if they don't restructure, so why should the gov't give in to them now? It just gives banks an incentive to restructure loans just high enough so people are still likely to default, thus bringing in gov't money. And I don't think my wife and I, who are slowly and surely building our savings for a future down payment while we rent, should have to foot the bill for the banks or the people who made poor decisions.
PS. For those of you in any time zone west of the East coast, the "Obamamercial" is excellent.

Now here's a plan:

How about regulation such that the lender of record (the entity with whom the buyer or buyer's agent deals directly) - must hold in its accounts 60& (that figure is fungible, but should always be greater than 50%) of the mortgage at its inception (or renegotiation) value, limiting but not wiping out the after-mortgage speculation, trading and slice-and-dice markets?

Congrats to Atrios.

alex,
Interesting. The objective is a good one; preserve communities to avoid a downward spiral of property value blight. Implementing the plan would require more than existing judicial machinery, though. It would set up sitting tenants in affected properties. The value of those properties would then be determined, practically speaking, by the "fair rent", as determined by whatever tribunal is assigned that task. A sitting tenant inevitably affects the value of a property, and the owner (purchasers at foreclosure sales, which most often will be the lender itself) will work to escape or avoid it. This will give rise to a number of problems, some common to rent control regimes everywhere, and others specific to the contemplated arrangement. These would need to be addressed through a specialized tribunal of some sort.

First, it is not obvious that this could be applied directly at the Federal level. Most of the rent control regimes in the US date from a price adjustment measure introduced during WWII under, shall we say, rather different circumstances. The order established special zones in which controls would be imposed. These controls were later incorporated into state or municipal law. Property relations are ordinarily recognized as residing at state level, so you would probably face constitutional challenges if you tried to do this top-down, in the current environment, for a limited class of properties. Lenders, or foreclosure purchasers, would call it a constitutional taking.

Second, what is the scope of application? All mortgages subjected to foreclosure proceedings? If only "predatory mortgages", how are they to be defined? Is there a cut of date or a period during which the mortgage must have been created? If so, what about refinancings and second mortgages?

Third, if the rental arrangement would be triggered by formal foreclosure proceedings, lenders can be expected to seek or devise other ways of realizing their interest in the property, or of making application of the legislation difficult. What is the effect, for example, of a transfer of title from the borrower to a third party? Or of a voluntary surrender of the property to the lender? You would need to be ready to sort out legitimate transactions from those affecting the objectives of the legislation, and the line will not always be clear.

Specifically with respect to the rental arrangement, is the tenancy to be transferable, and if so under what conditions? Can it be inherited or devised by will, and if so to whom? What is the formula for setting rents, and is the tenant's ability to pay a factor? What is the effect of a transfer of title before foreclosure (i.e. to a mortgage rescue agent)? What is the effect of a voluntary refinancing arrangement?

That's just off the top of my head; there would be additional problems and lots more detail once you got stuck into implementing this. Which is not to say that the plan is necessarily a bad idea; but you would have to go into it with your eyes open to the bureaucratic and rulemaking requirements that it would spawn.

Jassalasca Jape,

Good questions. Best addressed to Dean the next time he mentions it on his blog:

http://www.prospect.org/csnc/blogs/beat_the_press

I'll take a stab at a few though.

Implementing the plan would require more than existing judicial machinery, though.

I'm not sure that's true. Dean suggests that it can be handled as part of the judicial procedure for a foreclosure. AFAIK that varies from state to state. Not sure if the Fed's can set conditions (certainly they can for bankruptcy, but this is different). Of course nothing says that sundry states can't do this of their own volition.

rent control

I don't think this is really rent control, as it (hopefully) wouldn't apply to most properties. Courts are forever deciding "fair and reasonable" costs.

Second, what is the scope of application? All mortgages subjected to foreclosure proceedings?

I think that's the idea.

What is the effect, for example, of a transfer of title from the borrower to a third party?

I don't think you can do that without satisfying the lien. If you meant lender, then it shouldn't affect the borrower's option to rent. CDO's are a pain though - nobody seems to know who owns the mortgages or is legally entitled to change the terms.

Some type of bailout is appropriate but there has to be some type of claw back, catch, downside for people who purchased house they could never afford (this should also be applied to anyone who went with an ARM when the 30yr fixed was at an all time low)

I don't want to see families driven out of their homes, but I don't want to see inflated home values propped up by taxpayer dollars. (of course this doesn't apply to homes in my neighborhood)

Still, I'll bet it's not too far off the mark, and it sounds like a decent plan. It would be nice to see a chunk of that $700 billion being put to use helping someone other than a bunch of bankers.

Its in the bankers' interest to restructure the loans, since (given the collapsing housing market) they often stand to lose more with default than they do with restructuring the loans. (Especially given that, from the descriptions I've seen, participation would be voluntary on a per-loan basis, so they won't choose to do it except where it is already beneficial to them.) Since they are being given something (the guarantee) at public expense to do something that is already in their own individual best interest, how is this anything but a handout to bankers?

If the government wants to reduce the risk of default in a way that principally helps homeowners, and helps banks only by reducing the the total amount of toxic debt in the system, it would make more sense for the government to use eminent domain to purchase distressed mortgages at their current value, restructure them, and then sell them on the open market (not necessarily immediately), using objective criteria to choose which mortgages to acquire and the terms of the restructuring.

One of the big problems seems to be that nobody wants to take a big haircut & shave while others walk away without a loss. So, firms are holding onto toxic assets instead of writing them down, restructuring them, etc. in hopes that when the big fix occurs they can hold them to maturity and get full value or sell them for full value before that. Nobody wants to go first.

Who should government PUSH first? How can it be fair and good for the economy?

It's also tied to the Credit Default Swaps. If you have a lot of defaulting mortgages then the CDSs get executed and some big guys go bankrupt. If you wipe out CDSs then people who have paid money toward them have lost out. Unfairness abounds.

I suggest a resolution of the Credit Default Swaps as they are confusing the real issues. There should probably be a great flush of existing ones and either a ban or heavy regulation of future ones.

Second, continuing to get toxic mortgages out of the system is a major goal, but holders don't want the loss. So, a plan, such as this article suggests, might help ease the way. I too would want to see more detail, but any ARM would certainly be a candidate mortgage, but only on first homes one lives in.

Help banks who are having problems with regulated capital requirements if they help us by refinancing mortgages.

Nobody should get out of this scott free. Everybody screwed up and should pay in some way.