If Niall Ferguson Wants to Reduce My Mortgage . . . .
I say let him! Fresh off a victory lap in Davos with Nouriel Roubini and Nassim Taleb, Niall Ferguson lights up the Financial Times with a little proposal of his own. First he suggests nationalizing the banks without nationalizing them, which has plenty of sense in it:
The second step we need to take is a generalised conversion of American mortgages to lower interest rates and longer maturities. The idea of modifying mortgages appals legal purists as a violation of the sanctity of contract. But there are times when the public interest requires us to honour the rule of law in the breach. Repeatedly during the course of the 19th century governments changed the terms of bonds that they issued through a process known as “conversion”. A bond with a 5 per cent coupon would simply be exchanged for one with a 3 per cent coupon, to take account of falling market rates and prices. Such procedures were seldom stigmatised as default. Today, in the same way, we need an orderly conversion of adjustable rate mortgages to take account of the fundamentally altered financial environment.
Another objection to such a procedure is that it would reward the imprudent. But moral hazard only really matters if bad behaviour is likely to be repeated. I do not foresee anyone asking for or being given an option adjustable rate mortgage for many, many years. The issue, then, is simply one of fairness. One solution would be for the government-controlled mortgage lenders and guarantors, Fannie Mae and Freddie Mac, to offer all borrowers – including those on fixed rates – the same deal. Permanently lower monthly payments for a majority of US households would almost certainly do more to stimulate consumer confidence than all the provisions of the stimulus package, including the tax cuts.
Funny how we haven’t heard in awhile the plan to use the US Treasury’s ability to borrow at 2% to support 4.5% mortgage rates. But does the unexpected up-turn in houses going to contract reported yesterday obviate the need for this plan? I hope not, I could use the cheaper mortgage rates to pay my property tax bill.
Source:
Beyond the age of leverage; new banks must arise
NIALL FERGUSON
Financial Times; February 3, 2009
http://www.ft.com/cms/s/0/85106daa-f140-11dd-8790-0000779fd2ac.html
Tweet
Facebook
Reddit
Digg this!
February 3rd, 2009 at 11:58 pm
But what about all those renters and prudent borrowers out there who were wise with their money?
Maybe what should happen is that a portion of all interest paid from the reset mortgage go into a pool that ends up being rebated to all taxpayers not participating in the reset mortgage plan. In other words, since the prudent are funding the imprudent and giving them a break the imprudent should be compensating the prudent in some direct way. That will at least make more, if not everybody, a little happier
February 4th, 2009 at 12:23 am
Oh, so weve found the end of the rainbow so that we can give everyone a basket of money tax free.
There’s been way too much fraud and bad judgment on the part of many, but not all, borrowers for me to really like this idea.
I suppose if we could magically drop mortgage rates, keep them low, and offer the same rates to all interested refinancing parties and new buyers, that’s about as fair as we could hope for. But how do we do that?
Perhaps if the feds can engineer an interest rate drop, the market can self-correct, not necessarily rescuing everyone, but making some more room in the lifeboat. And that should make the interest on debt less for our fed friends.
February 4th, 2009 at 11:54 am
@ usphoenix, I think your idea seems more rational.
To expand upon it, it seems to me this would be the way to go – something along the line of the now government owned FM/FM offering the option to refinance your mortgage directly with them at some low set fixed rate (5% maybe), no matter if you’re in trouble, or not, or a completely new buyer. This way some relative “fairness” is maintained. Do it for some set period of time, say 12-months. As a new buyer or someone who wants to take out additional equity, you would need to qualify like any other loan. Current owners would automatically qualify (after mandatory credit counseling) for their current mortgage principle plus, say 3 current payments, in order to catch up if they’re a little behind. If one is behind by more than 3 payments, then it’s probably too late. And of course, this would only apply on a first homes that are owner-occupied. This way renters and current responsible home owners don’t get completely left out. This also gets some good and a lot of bad loans off the banks’ books so they can deflate to a more reasonable size, freeing up credit for other uses. Once the 12-month period is up, rates should be allowed to raise at a reasonable rate.
At the end of the day, it’s better for these homes to be occupied by people with poor finance skills than vacant and dragging the rest of the neighborhood down with them in a domino effect. No matter what happens, even if the government doesn’t intervene at all, there will be some winners and losers who just don’t deserve the outcome they get. That’s life, so we just need to pick something that does the best job of keeping the system stable while minimizing the reward for those who were irresponsible and also minimizing any punishment for those who were.
February 22nd, 2009 at 11:47 pm
A government mandate for the recall, reduction of principal balance to current appraised value and replacement mortgage issued for all defective mortgages. The banks had prior knowledge that discounting massive Reo’s in the market would lower housing values, which would intentionaly financially harm existing customers essentially making their mortgages defective . Said mortgages were unilaterally changed from a secured lien to a partially secured lien with an unsecured loan on it, defective .
The total loss to be experienced by the financial sector is 1.2 Trillion Dollars if 25% of all homeowners were underwater and a estimated average of 40% of principal had to be reduced to match current appraised values, eliminating negative equity (and all adjustable mortgages).
The following 3 rules apply for all 3 groups: 1- owner occupied,2- citizens or resident aliens, and 3- proof that the new mortgage payment is lower or will be lowered:
1-Current but underwater, automatic principal reduction given , you are a good credit risk, fixed rate interest of 5.5%, no ratio’s or income guidelines applied. No appreciation profit allowed for 5 yrs.
2-Current but have equity or close to 100% of current market value, automatic refinance allowed to lower interest of 4.5%, to current appraised value , no cash out , no ratio’s or income guidelines applied.
3- Delinquent and underwater, principal reduction allowed BUT subject to sufficent income to qualify within 33/41% ratio’s at 6.5% . No appreciation profit allowed for 10 yrs.
If the homeowner can not qualify at the lower principal payment at FRM for 6.5% within guidelines, a foreclosure must occur. (bad decisions or overbuying is not rewarded). The former homeowner will be allowed to RENT for up to 1 yr to avoid vacancy and homelessness at a greatly reduced rate. The rent will be paid to the bank, no rent for 60 days, automatic eviction on 61 day.
The current REO’s and future will be sold to the public at the current appraised values at 4% interest subject to normal underwriting criteria. If it is found that the potential borrower pool is insufficent to purchase the REO market inventory, a goverment subsidy in the form of a 10 yr forgiveable grant can be used for lower income borrowers.
Moral hazard is eliminated. -
Negative equity is eliminated
All adjustable mortgages waiting to re=set is eliminated
There is just punishment and rewards given to all .
The free market capitalism system is still in effect, some banks may fail but the system won’t and it will be based on their own past companies business decisions.
The government has spent, outlaid, and guaranteed over 9 Trillion Dollars OF TAXPAYERS MONEY to support a banking industry that holds appr. 12.1 Trillion Dollars in outstanding mortgages without correcting the problem of foreclosures and declining housing values . The above mandate would cost ALL banks and investors of said mortgages 1.2 Trillion dollars to correct, not the taxpayers.