Monday, October 27, 2008

Foreclosure Crisis Solved!

Channel 8 ran a great little piece tonight about the foreclosure crisis (which you can hear here), with 3 different viewpoints on how we could get out of it.

The 24-hour news cycle has generally meant that "news" is now comprised of 2 to 10 'experts' shouting their talking points at each other in 2 minute segments. I usually ignore it all. But I often count on PBS for thoughtful and polite discussion of news events. I'll admit PBS is left of center, but I haven't found any right of center sources for thoughtful, polite discussion, so I keep watching public television.

Tonight's three experts (who never once shouted at one another and thus made their Mammas proud) were

  • Bruce Marks, the Chief Executive of NACA, the Neighborhood Assistance Corporation of America, a not for profit advocacy group

  • Dan Alpert, founder and Managing Director of Westwood Capital, a small investment bank

  • Neil Irwin, a financial reporter covering the situation for the Washington Post

Bruce Marks of NACA made a point that I was explaining the other day to my hairdresser.  Fannie Mae and Freddie Mac own or service 50% of the country's mortgages. They were "too big to fail" which is why the Feds bought them out. Being too big to fail also means that policies they put in place are generally adopted by nearly every player in the sector.

NACA's Marks continued. Since the US government now owns The Two F's, Treasury Secretary Hank Paulson already has the power to fix the foreclosure problem and just isn't doing it. If the Two F's tweaked their policies for handling delinquent mortgages, they'd solve the problem for the loans they own/control, and the rest of the industry would follow along.

It's discouraging that this very salient point is getting so little news coverage.

Marks says the Two F's could immediately fix the foreclosure crisis by working with individual troubled homeowners to agree to a deal that would:

  • adjust down the principal owed on the mortgage, and/or

  • decrease the interest rate, and/or

  • extend the loan period from 30 years to 35, 40, 45+

While lenders won't be getting their 9%, 10%, 14% or more interest payments anymore, they will avoid spending the money on foreclosing, and will have a homeowner who continues making payments for years into the future.

But instead, Marks says Fannie's current rules state that:

  • Fannie will not reduce the principle owed in any circumstances

  • Fannie will not reduce mortgage interest rates below the current going market rates

  • homeowners must be 4 months behind on payments before they're eligible for help

Neil Irwin of the Washington Post reminds viewers that renegotiating home mortgages involves private contracts, which cannot be forcefully renegotiated by outsiders. Since mortgages were sliced & diced, securitized and sold, finding all the parties involved in getting new mortgage agreements is a Herculean task. These include the original lenders, servicing companies, trustees and even the securities buyers such as foreign governments and/or pension plans.

Irwin also offered an anecdote: Sheila Bair of the FDIC had an experimental plan for massive mortgage renegotiations when the FDIC took over IndyMac in early August. IndyMac had 60,000 troubled mortgages and as of last week had only managed to renegotiate 3,500 loans.

Irwin went on to describe the new government rescue plan (how many government rescue plans is that now?): banks voluntarily renegotiate loan terms and in exchange the government guarantees the lender against any future losses (if the homeowners default again in future, which is sadly quite likely and the subject of a whole other post).

Daniel Alpert of Westwood Capital politely disagreed with NACA's Bruce Marks, and generally agreed with Irwin. Then he presented his group's alternate plan. This involves requiring lenders to immediately work towards agreements with troubled homeowners that include the following:

  • troubled homeowners volunteer to be foreclosed on

  • banks and homeowners agree to a lease back for a term of 4 to 6 years so homeowner stays in beloved home

  • homeowners retain the right to buy back their home at lease end at then-current market prices

Alpert says his group's plan helps lenders avoid the high cost of foreclosure (which can be up to 30% of the value of the original loan!). It also helps homeowners stay in their homes, while rebuilding their credit and eventually re-buying the home, potentially at a price lower than originally negotiated. The key to Alpert's plan is making it mandatory for lenders to participate in the plan. Alpert agrees with Irwin's anecdote: giving banks room to say "no thanks" only leads to higher foreclosure rates.

What did I take away from PBS tonight? I think that we should lock Alpert and Marks in a room until they mush their two ideas together, then give the reporting job to Irwin. 'Kay?