Mortgage Rescue Wonkery

"The federal government doesn't have the authority to unilaterally abrogate private contracts." Well, it does, sort of; it's called bankruptcy. We can get a lot of the way there by modifying the law on Chapter 13 debt repayment law. Another possibility might be to enact a new, limited type of bankruptcy for the limited purpose or reviewing and if necessary modifying mortgage tems.

It is indeed demagoguery. The challenge of simply intervening at the corporate level, either with banks or car companies is far simpler. There are a very limited number of actors, the legal mechanisms are there and the menu of choices is relatively clear. With individual mortgage modification, there are layers upon layers of complexity, an unknown number of actors actually needing assistance and serious questions of perverse incentives. Although a financial illiterate, normally Drum you are better than such idiotic commentary.

Throughout his Presidency, George Bush has been extremely consistent-Given a choice of good, bad, or totally disastrous to the Nation, he has always chosen the latter! Why does anyone expect anything to change until after Jan. 20, 2009?His worshippers in Congress have also been the source of ongoing disasters-They cannot or will not help themselves. Even when threatened by their constituents, they continue to heap more and more harm upon the Nation. When Obama ran on Hope, he had a REAL Winner and won! Now if we could only get rid of the Whiners and Losers that were elected to Congress, the COuntry might be able to recover from 8 years of pure undiluted Hell!

Those who wanted the bank bailout framed it properly -- "financial meltdown" -- and manufactured a mini-crisis (the Lehman bankruptcy aftermath) with help from friends in high places (Treasury/Fed Reserve) to help sell that idea. That helped push that bailout through.

Those who support the bailout of the manufacturing industry should frame it appropriately and cause a mini-crisis to demonstrate the effects of not saving manufacturing industry.

This is a high stakes play to grab taxpayer money. The financial companies managed to get a big chunk and they don't want to share their spoils with other industries. This is Bush's parting gift to the country.

I'd have to second Ken D.'s comment. We have a very sound process for sorting out the complexities associated with bad debts - the courts through foreclosure and bankruptcy. Instead of figuring out a legislative bail out, it would be much more effective to:

1) Freeze foreclosure proceedings for owners willing capable of making, say, their Jan 1, 2008 payments.

2) Allow the courts to appoint a representative for debtholders if they cannot represent themselves in a timely fashion.

Beef up the court system with and additional $100M in funding to handle the case load and away you go.

I'd be willing to bet the the noteholders would figure out how consolidate their legal representation when faced with that possibility.

Ken D. and Tentakles are a bit more correct than they know. Bankruptcy lets the Feds unilaterally abrogate contracts, but it is not the only way to do so.

There is also eminent domain. Most people think of eminent domain as something that only operates on real property, but this ain't so. It can operate on almost any form of property, including those contracts known as "mortgages." Eminent domain of mortgages has two beauties. First, a state can do it, as well as the Feds. Second, although eminent domain of this kind requires compensation, the compensation only has to be the market value of the mortgage, which is unaffected by intercreditor fights of any sort.

So the government takes the mortgage, plunks down some coin in front of the service, and lets the investors fight it out. It then takes the mortgage and refinances it with an equity kicker, recouping most of the cost of the operation fairly quickly, with a chance to make a profit on the back end.

Solutions like Mike Barr's are rational if you think that bankruptcy cramdown or eminent domain are politically or administratively impossible. A reasonable person can think so. (I have no opinions about political possibility; but the experience of the bankruptcy courts and the HOLC argue that bankruptcy or eminent domain are administratively feasible.)

I have no problems with Barr's proposal. But not even talking about these other options pushes the Overton Window in the wrong direction.

Let me add to the chorus of people who say "HELL NO" to a bailout of homeowners. My wife and I have scrimped and saved for years to build up enough money to put a large down payment on an affordable house. Screw anyone who now takes that money (either through taxes or deficit spending) and gives it to someone who put no money down on a house they couldn't afford.

I reluctantly supported the first bailout because it had to potential to take down every part of our economy. Not this proposed homeowner bailout. However sad it is that some people might get foreclosed upon, is it that fucking tragic for them to have to rent an apartment for a while instead?

Although the problem is not simple, there is a solution that will benefit all, but not give undue benefit to those who don't deserve it.

Have a program that:

1. Reduces the amount of mortgages to the market price of the house (we will need honest appraisers).

2. Give the note-holder an equity in the house equal to the fraction of the note that was lowered (note or $600,000, value of house $400,000, noteholder has a 33% equity interest in house).

3. On sale, if sale is above $400,000, the amount above $400,000 is split according to equity between "homeowner" and noteholder.

4. The mortgage will switch to a fixed note at the current, best, mortgage rate. If the homeowner cannot afford it, then forclosure. No bankruptcy cramdown.

The amount the noteholder will be entitled to will be the original difference in the mortgage + inflation + a fixed percentage.