Obama Needs a Mortgage Default Plan Fast

The announced policies of the Obama team are not adequate. I don't mean simply that the stimulus plan is not big enough. There's time to build that up.

Rather, in the past few weeks, the credit crisis took a turn for the worse that is not fully understood. It showed up most dramatically in the losses Merrill Lynch reported -- and that forced Bank of America to go begging to the federal government for help. Then State Street of Boston stunned the community with gargantuan losses.

Was B of A foolish to buy Merrill? Yes. But what the Monday morning quarterbacks don't acknowledge is that the situation deteriorated rapidly after they made the deal. And this is now what the Obama team must handle.

What happened? Defaults are still running high, in a nutshell. Lost jobs and lower incomes are making them worse, and the value of those mortgage backed securities, which are now the heart and soul of banking -- and the deep mortal wound as well -- keep falling. Few if any have fully understood or anticipated the ongoing dangers.

President Obama moved with haste and intelligence when it became clear that a new stimulus package of substantial size was needed. He took care to add tax cuts, which is a pity. But this will be his style. Give a little politically to get something.

But more is now necessary. Many economists turned up their nose at Paulson's first instinct to stabilize the mortgage-backed obligation market by buying up bad assets. Just give them capital, the right and left argued with vehemence and a fair degree of arrogance. But if the value of the assets keeps falling, more capital just goes down a hole.

As of today, we hear the Obama team is talking about a plan to stabilize the market by buying or insuring bad assets. No plan can be perfect, but we need some plan quickly.

But, far more important , we haven't heard about a plan to stanch the mortgage defaults, which are daily making the stabilization of the credit markets ever harder. What's the Obama plan?

We also have not heard enough yet about re-regulating these entities. Granted, that can wait a bit. I'd be more comfortable if some "anti-deregulationists" were on board the Obama bus.

This economic team is technically capable but they are hardly visionaries. The leaders of the team -- notably Summers -- supported deregulation strongly in the 1990s. They were at one with Greenspan's free market philosophies. None of them warned about how serious the dangers were early on. None of them insisted Greenspan look more closely at shadow banking when they were out of government in the 2000s. None wanted to regulate derivatives. And Geithner was there, in a position to oversee banks, all along. Now, they have been slow to come up with a defaults solution. Why? It's risky, that's why. It's not a known quantity. But Obama now has to take risks. Here's hoping the Obama team has a few who are unafraid to stick their necks out.

Comments

[Thermodynamics]

I guess it will be wildly unpopular but we need

1. some sort of moratorium on foreclosures -- We need to keep the homeowners in those houses to keep the neighborhoods up.

2. some extraordinary legal way to keep defaults from rippling through the financial system via the credit default swaps (defuse default events )

3. and some sort of assistance to home owners who have lost their jobs

All this will be unpopular because its like The Little Red Hen in reverse ---- we will be helping the people who were not careful and restrained.
But we need to do this for our own common good. Yes, I would like to make the bankers pay, but letting retribution sink Wall Street might sink us all for a decade.

[RightWingMarine]

if the penalty for non-payment is removed (the moratorium on foreclosures) why would anyone make any house payments? Why would any lending institutions lend any more if they have no method of enforcing repayment of the loan?

[Peter007]

Government policies and regulations insure that we will continue to have only large behemoth banks. The congress and politicians like it that way. When the only banks are big banks, than they become too important to fail. The bankers and the politicians like this arrangement. The public is outraged and they are against the bailout 80% to 20%. But the congress still votes for the bailout. Why ?
Its because the two institutions are in bed with each other.
For those of you calling for more regulation, you should be aware that it's the banks that write the legislation. The congress tells them what they want to accomplish and then the banks write the laws.
I know, I'm in banking.
The effect of any new regulation will to make the largest banks stronger and smaller banks weaker.
DC is filled with high priced lobbyists. They earn their high fees.

[aspertame2]

Tomorrow's first time buyers will include a lot of college grads with a lot of global market drag on their earning capacity. If they can't bid up on the low end, the whole food chain goes dead. Prices have to revert to a reasonable multiplier (1.5-2.5 times actual, verifiable gross incomes). Lenders can no longer find enough rubes to buy tons of paper that doesn't have Some Chance in Hell of Being Repaid, because we've just taught this generation anew that 2000% leverage on nothing, equals nothing.

We haven't accepted yet that the least painful dystopia is one where prices go back to affordable for the people who will live in the homes. Without acceptance of that reality, there's no sane discussion possible.

[RightWingMarine]

is there something preventing new homebuyers from buying homes with the mulitiplier that you specify? Were banks refusing to loan young couples money to buy a modest home and only loans would be granted if the house was several times larger than what the person needed?

I'm not sure what is meant by affordable housing. I've never lived in unaffordable housing. When I was in college I had a tiny one bedroom place that was so small it had only one window, but it was cheap and I could pay the rent. After I entered my career I moved to a nicer place with more windows that costs more but now I earn more and I can swing the rent there too. I could have chosen to try and live in a big house when I was in college but I knew I could never pay the mortgage so I didn't try. Is there some reason other people can't likewise make rational decisions like this?

[RightWingMarine]

buy up or insure bad assets? What on Earth for? If it's an investment I wouldn't make with money directly from my pocket why would I want the government to use money it takes from me to buy those investments?
By buying and insuring the bad investments doesn't that simply encourage more investment in risky schemes? If the govt will protect you against loss then why not? What have you got lose?

Kind of ironic that HRC of Whitewater fame is going to work in the administration that bemoans people losing their homes.

[IndependentMeans]

What I find frustrating is a company like our mortgage holder, GMAC. We have a 15 year fixed rate loan which we have always paid on time. We have suffered two job losses here and I requested our 15 year be changed to a 30 year. I did not ask to lower the rate or any other favors. They refused help each and every time I called and told me to default and then I could get maybe get assistance. I personally feel this is what needs to be addressed to avoid future defaults. I have read on blogs several people in our situation.

[blood1]

A couple of comments:
Jeff, if this is an edited comment, you still need to use SPELL CHECK - as this may be read by individuals across the world, they should not see us as illiterate.

I have not seen any economist back in the 1990's who forecasted this economic disaster, so to deride Larry Summers is to say that no economist from that era should be allowed input as they were all wrong. I just question the honesty of that statement.

I do agree that the failed individual mortgages were a major cause of this crisis and blame who you will, business was willing to take the risk as long as they made money. No, I don't have any great solution, but if it can be resolved without the country going bankrupt, then I will support that effort.

My suggestion going forward EDUCATION! If all of the individuals who purchased the sub-prime mortgages actually understood what they were actually getting, perhaps they would not have signed up. If all those who used credit cards to support a lifestyle for which they could not otherwise participate were educated about credit, perhaps they would have been more responsible.

To the critics of government action, what are you suggestions? All I have read/heard is complaints, no alternatives (doing nothing?). Additional money to the banks is unacceptable, as they have been mute about the impact of the billions that they have already received.

[usedtowander]

These banks lived by the markets. They should die by the markets.

These executives created these mortgages. They created these derivative securites. They profit, individually from them. They knew the risk.

Corporations pay their executives extraordinary amounts - Richard D. Lewis of BofA received a salary of over $24 Million and exercised stock options of more than $77 Million - in a company losing money and receiving subsidies from the government.
When officers of the company like Richard Lewis, the architect of their failure, and others such as Barbara Desper, Pres. of BofA Mortgage, and ALL the others who have profited AND CONTINUE TO PROFIT on the back of millions of people, give up their salaries, then we can talk about helping these corporations out.

Until then, any subsidies to these corporations is simply stealing from us to pay their exhorbitant salaries. Robbing the masses to pay for salaries to the elite corporate executives. I fail to see how this is anything other than more of the same that Bush offered.

[FogBelter]

"But, far more important , we haven't heard about a plan to stanch the mortgage defaults, which are daily making the stabilization of the credit markets ever harder. What's the Obama plan?"

"Here should be an objective of Government itself, to provide at least as much assistance to the little fellow as it is now giving to the large banks and corporatio­ns."--Fran­klin D. Roosevelt, April 7, 1932