The horizon is not so far as we can see, but as far as we can imagine

How To Help Homeowners

Now that the President’s plan to help homeownevers, HAMP, has clearly proven to be a failure, let’s go back to how to do it correctly.

What the government should do instead is set up a Trust to buy mortgages at a discount, then reset them to 20, 30 or 50 year fixed mortgages with a reduced face amount. If the house is later sold, half of the increase goes to the government, so that taxpayers make a profit. The mortgage cannot be paid off before the end of its term so that financial scavengers cannot come around and, as they did over the last ten years, say “get rid of that mortgage, and take ours. It’s better. Honest!”, because we know that when they say better, they don’t mean better for the mortgage holder. The mortgage is attached to the property and is transfered to any new buyer. And the mortgage cannot be removed from the property, and any new mortgages attached to the property are junior to the government mortgage.

Now, when I first made this suggestion back in 2008, the banks would have been eager to sell.  Right now they won’t, because they have record profits.  So using this plan also requires a whip hand.  If the banks won’t sell, then the Fed starts pushing back onto them the bad paper of theirs it is holding (which includes a pile of bad mortgages), or raises rates for the banks, or just threatens them with accounting changes which will force them to recognize their losses right now (there are plenty of losses that should be on the books.)

Or you could just pass a law forcing the banks to sell underwater mortgages, but let’s face facts, that isn’t happening in this Congress.

End results:

a) a floor is set for mortgage prices (the price should be based on what the long run price was in the area before the housing bubble.) This ends the confidence crisis in these securities (yes, there is still a confidence crisis, it’s just muted because the Fed, Freddie and Fannie are sitting on the toxic waste pile they took from banks), because there is now a market price—what the Trust will pay.

b) It helps homeowners stay in their homes.

c) It gets rid of overly complex mortgages and puts in their place a dead simple mortgage that anyone can understand.

d) It punishes lenders, which they deserve, for making loans they should never have made.  On the other hand, they get more money than they probably could on the open market if the Feds weren’t keeping bad securities off the market.

e) While it does keep homeowners in their homes, it doesn’t let them off scot-free either. In exchange for a good mortgage they can service, they give up some of the future profits on sales in their houses.

f) The government will almost certainly make a long term profit on this. This is important, because it’s not fair for people who aren’t underwater on mortgages to spend hundreds of billions or trillions bailing out those who are without some expectation that in the end it won’t be more than just a transfer of wealth to them and to investors and banks.

In 2008 I wrote:

If they do give the administration what it wants, then Wall Street and the Banks just got bailed out, no help goes to ordinary people and you get stuck with a trillion dollar bill. Taxpayers get all the toxic assets, but Wall Street, who paid themselves more in bonuses in 2007 then 80 million Americans got in raises, keeps the profits.

And that’s exactly what happened.

It would be beyond swell if Democrats got serious about actually helping homeowners in a way that’s good for the country and good for homeowners, rather than a placebo meant to look like action is being taken.


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  1. HAMP was not a “failure” but a success. Not only did it shove more little people under the bus, so that the banksters could profit, it kept us from knowing how big The Big Shitpile really is, since the banksters never had to clean up their balance sheets. These are features and not bugs.

  2. anon2525

    Right now they won’t, because they have record profits.

    Just so it’s clear, the six largest bank holding companies made money from trading only in 2009, while the remaining 980 bank holding companies lost money in 2009. Nobody made money (net) from “banking” (how quaint!) in the U.S. in 2009. Only the rigged casino made money.

    Six Giant Banks Made $51 Billion Last Year; The Other 980 Lost Money

  3. anon2525

    So using this plan also requires a whip hand. If the banks won’t sell…

    I’m not sure that there is any plan that works if “works” means “keep people in houses and keeps banks in business.” Nothing has been happening here for the same reason as in Japan: if the banks acknowledge the true value of their loans then they are insolvent. This is why the banks are not selling most of the houses that they have repossessed — because if they were to sell them all, then their losses would cause them to close their doors.

    Am I correctly interpreting what you have written, or do you see the banks as being closed under your plan, too?

    Aftermath of the Global Housing Bubble

  4. Ian Welsh

    Yes, I know where their profits came from.

    This plan rescues the banks to a certain extent. Their holdings aren’t worth 70% on the dollar, or whatever. They take a loss, yes, but not a full loss.

    This is essentially the same plan I proposed in 08. I cut and paste most of it.

  5. hidflect

    Ah, Mr. Welsh. The coldest room in hell is reserved for those who predict the future, are proven right but could do nothing to change it. You are a Cassandra, I fear. If you lived in ignorant bliss you wouldn’t have to turn and toss at nights at the gross injustices. Thanks for the warnings – no good deed goes unpunished.

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