I think these decisions ought to be made by the banks, and not by government mandate. There is nothing to prevent a bank from restructuring a loan on its own. If it wants to take ninety cents on the dollar, all it has to do is rewrite the loan.

Well, then, I think you have failed to understand the nature of the modern mortgage market. In most cases, the loan(s) in question have long-ago been securitized and sold-off to investors. They, not the servicer of the loan, are the ones face the default (or foreclosure) risk.

Yes, the servicer could renegotiate the loan, but they have no particular incentive to do so. And the investors, who purchased little tranches of thousands of loans are in no position to force them to renegotiate.

In fact, you (through your pension fund, or municipality) may be one of the creditors, now staring down this foreclosure risk (perhaps not, given you apparent lack of concern).

Mark wrote:

Jacques, slightly higher interest rates is not a trivial concern when credit is tight and even good borrowers are having difficulty tapping the markets. The Fed’s rate-cutting spree will help some, but at the risk of cratering the already precarious position of the dollar….

I’m afraid I don’t understand your argument, Mark.

Interest rates are at historic lows. That’s not the problem. Lenders are not issuing new loans, because they can’t sell them. They can’t sell the loans because the market for mortgage-backed securities has collapsed. The market for mortgage-backed securities has collapsed because of foreclosure crisis, under discussion discussion here.

You think that attempting to resolve the foreclosure crisis will make mortgage loans harder to get?

Huh?

I think these decisions ought to be made by the banks, and not by government mandate. There is nothing to prevent a bank from restructuring a loan on its own. If it wants to take ninety cents on the dollar, all it has to do is rewrite the loan. My problem is when the government takes the role of forcing the banks to restructure loans, because the state ought not to interfere in a private contract. (Bankruptcy is different, because one of the parties has already defaulted.) People make bad deals all of the time. I don’t think it is the role of government to rescue them when they are reckless or foolish.

Moreover, I don’t think “it is better for all concerned” for public funds to be used to rectify the excesses of the housing boom, at least over the long term. In the short term, it will be great: property values will stabilize, stock prices will go up, and things will calm down, at least for a while. However, by goosing the market, the government is contributing to recklessness in the future. If people think the Fed will bail them out if things go wrong, they will take on more risk than if they knew that they were solely responsible for their actions. In my view, there is no reason for the taxpayer to subsidize this risk. People should buy a house if they can reasonably expect to carry it, with the understanding that they face the possibility of selling the house into a falling market if things go in an unexpected direction. If people decide to throw caution to the wind and buy anyway – and if things don’t work out – then I don’t think the taxpayer should be the one to clean up the mess.

Hillary’s plan is to establish a $30 billion fund to purchase distressed properties for resale or rent.

These are properties which have already been foreclosed? She’s then, essentially bailing out the lenders, after the fact (by taking these properties off their hands). It would be better, I think, to avoid foreclosure, wherever possible.

I’m not familiar with Frank’s plan, but I’m philosophically opposed to the government rewriting private contracts.

Every Bankruptcy proceeding is a case of the Government (in this case, a Bankruptcy Court) rewriting private contracts.

If you prefer a string of bankruptcies (personal and corporate) to a more orderly (and less catastrophic) process, so be it.

But I think this is better for all concerned (most importantly, better for those of us who had no hand in either side of these bad transactions, but will suffer mightily from the side-effects of a meltdown in the mortgage market).

(e.g., if the banks are forced to write down the loans, which will cause their capital ratios to shrink – what do you do when the banks start collapsing? Bail them out too?)

That’s what’s going to happen if nothing is done. The point is to avoid a string of collapses, by making sure those lenders get 90¢ on the dollar.

The Fed agreed to lend JPMorgan Chase $29 billion and to hold as collateral what Fed officials estimated were $30 billion worth of mortgage-related assets owned by Bear Stearns. Working together, Fed and Treasury officials were convinced that Bear Stearns was about to go bankrupt and set off a systemic breakdown in financial markets. … No one knows the real value of the assets formerly owned by Bear Stearns that the Fed agreed to take as collateral. Fed officials have said they greatly discounted the value of those assets before agreeing to the $29 billion loan, but they have offered no detail of what those assets actually look like.

http://www.nytimes.com/2008/03/27/business/27paulson.html?_r=1&ref=business&oref=slogin

In other words, as long as the ultimate value of the assets is at least $28 billion (because JPM is on the hook for the first billion), then the Fed makes money. They have $2 billion in wiggle room from their estimate of $30 billion in fair market value. If the ultimate value is less than $28 billion, then the taxpayers pick up the tag. However, nobody knows if the Fed estimated too high or too low. This is in contrast to the plans being circulated to bail out homeowners, which has the certainty of requiring taxpayer money.

2) Hillary’s plan is to establish a $30 billion fund to purchase distressed properties for resale or rent. I’m not familiar with Frank’s plan, but I’m philosophically opposed to the government rewriting private contracts. It’s not the government’s proper role to interfere in binding contracts, and there can be too many unintended consequences (e.g., if the banks are forced to write down the loans, which will cause their capital ratios to shrink – what do you do when the banks start collapsing? Bail them out too?)

When you write that “the Fed can assume the risk of those assets,” you are therefore using “taxpayer money to subsidize troubled mortgages.”

Umh, no.

What I was referring to was specifically the sort of action that the Fed took in the Bear Stearns case, a move of which you said you approve. Read the full paragraph that I wrote:

As a stopgap, the Fed can assume the risk of those assets (say, by allowing these securities as collateral for loans, as was done in the case of Bear Stearns). But the only way to make the financial system whole again is to deal with the underlying bad loans.

You wrote:

If, on the other hand, the Fed compensates the banks/homeowners for the delta between the face value of the mortgage and what the homes are worth (as I think Clinton is proposing), then you have a subsidy of a different sort.

Is that really what Clinton is proposing? I must have misunderstood the news reports.

I was suggesting (largely based on the Frank proposal), that mortgage lenders be required to take a bath on loans that are now under water. And homeowners, offered a fixed-rate loan for 90% of the market value of their home, would not be getting off free either.

2) The loans which the Fed accepted as collateral are not worthless. Some are and other aren’t; in any event, they were marked to market in the Fed’s actions. Hence their diminished value is reflected in the Fed’s actions, as well as the possibility that the Fed can end up making money if the marks were set too low. Hence your options 2 and 3 are the only two outcomes, as the loans have already been written down.