Sheila Bair, chairman of the Federal Deposit Insurance Corporation, the agency which guarantees bank deposits, has a plan to rescue mortgage borrowers.
Free money, courtesy of the banks, but backed by taxpayers.
Bair wants Congress to provide five-year, interest-free loans to borrowers who have bitten off more than they can chew. The money would get those borrowers to at least 20 percent equity, and it would force lenders to restructure those loans.
Lenders would have to pay a "subscription” fee to the Treasury to cover that five years of missing interest payments.
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"The existence of too many unaffordable mortgages has created a cycle of declining home prices and limited refinancing options that has contributed to more defaults, foreclosures and the ballooning of housing stock,” Bair writes in the Financial Times.
"This in turn has led to further home price declines.”
Government should now focus on getting the housing lending market back into a balance without overdoing it, Bair argues. "This can be done only through widespread restructuring of unaffordable mortgages into affordable ones.”
It’s a nasty mess alright. The latest Standard & Poor's/Case-Shiller home price index of 20 cities fell by 12.7 percent in February versus last year, the largest decline since its inception in 2001.
Seventeen of the 20 metro areas reported record annual declines. "There is no sign of a bottom in the numbers," says David Blitzer, chairman of the index committee at S&P, noting that all 20 metro areas have declined for six straight months.
Bair is aware of the "moral hazard” problem of rewarding people who took crazy risks by investing in homes solely to profit. She proposes a "simple” debt-to-income calculation — the one the lender should have done in the first place — to ensure that only loans that were truly unaffordable at origination get into the plan.
"This can be done only through widespread restructuring of unaffordable mortgages into affordable ones,” Bair says.
She points out that economists, including former Ronald Reagan adviser Martin Feldstein, have made similar proposals.
Bair’s plan, she writes, keeps the risk of re-default on mortgage investors and spreads the cost between the banks and their borrowers.
"It has built-in incentives for mortgage investors to qualify those borrowers who have a good chance of paying off a restructured loan over the long term,” Bair writes.
The plan also avoids write-offs, which are expensive, and requires investors to consent. The plan, she says, would work within existing contracts and securitizations.
"Most importantly, those homeowners who remain committed to their homes would be given the means to ride out the crisis,” Bair writes.
"The housing crisis is a national problem. Painful as it is, we must be prepared to apply government efforts now. The Federal Deposit Insurance Corporation’s past experience cautions us that prompt action is always cheaper than a delayed response.”
© NewsMax 2008. All rights reserved.
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