The government's Public-Private Investment Program has not been a success.
The original idea of the PPIP (at least most acronyms can be pronounced ... how do you say this one?) was to encourage private capital to purchase toxic mortgage products from banks. In order to do this the government was willing to provide loans and matching equity to private capital willing to buy from the banks.
The theoretical opportunities for private capital were actually quite good given the amount of leverage (use of other people's money -- i.e., taxpayer money) and management fees to be earned. The screw-up occurred when the economy started to recover and banks were not willing to sell their problem mortgage products at the prices the program was hoping for.
So, PPIP has not been overly successful. And frankly, I am not sad about that.
My problem with PPIP is how private capital will deal with private citizens in trouble with their mortgages.
A lot of people are very house poor right now. Defaults and foreclosures are not subsiding and they won't until we get our hands around unemployment and falling housing prices. As a result we have made a national decision to help people avoid foreclosure if we can. By the way, about 1 in 4 homeowners with mortgage are underwater. In other words, a lot of our country is hurting.
The problem with PPIP is that it will put decisions about people in mortgage trouble into the hands of private capital with no interest in the public agenda. Private capital has one goal and one goal only: to earn the highest yield possible. Private capital wants to buy mortgage securities for pennies on the dollar (if only the banks would cooperate) and then figure out how to wrench every dollar of value out of the mortgages underlying the securities. If that means throwing people out of houses, so be it. Private capital is not interested in public objectives.
At least with these mortgage securities in the hands of banks, we have some control over what happens. The Obama Administration has been jawboning a lot in its effort to get banks to modify mortgages. It has even incensed lenders and servicers by offering to pay them for every modified mortgage.
I am okay with the decision to do our best to keep people in their homes. What I am not okay with is when we outsource to private capital the process of dealing with homeowners. The result will certainly not be good for the homeowners.
Jim Randel is the founder of The Skinny On book series. His first book, The Skinny on the Housing Crisis, was awarded the Gold Medal in a book competition sponsored by an association of 600 journalists who cover housing and finance.