If something good comes out of the whole foreclosure scandal, it’s that the whole housing issue, which is a millstone hanging around the neck of the economy, has been brought to the fore.
The Obama administration’s mortgage-modification plan, HAMP, is a failure. Foreclosures are still rising. Hundreds of thousands of families will be thrown out of their homes this year. Banks are still playing “extend and pretend,” holding tens or hundreds of billions of dollars of bad loans on their books. Until this hairball gets untangled, the whole economy will continue to suffer
How do you even begin to solve a massive, seemingly intractable problem like this?
Reuters has a good package of stories out today looking at that. Who knows if the potential solutions they detail would be effective, but I like that Reuters is suggesting solutions, not just describing and diagnosing problems. We need more journalism like this.
First of all, Reuters doesn’t beat around the bush here. It comes right out and says that Obama’s plan is a failure and that we need to start over. Here’s one of its headlines:
As HAMP goes up in smoke, U.S. needs new housing plan.
In that story, Alina Selyukh looks at some possible fixes for the mess on the homeowners’ side. In another, Matthew Goldstein takes the investor angle (there’s a sidebar, too).
On the homeowners’ side, Selyukh looks at three ideas to help borrowers: a government-led mass refinancing proposed by a former top Bush economic aide. A plan that would force banks to let delinquent homeowners stay in their houses if they can pay market rent. In five years, they’d be given the chance to buy the house at market price. Finally, cramdown, which would allow judges to write down the principal or otherwise modify mortgages for borrowers in foreclosure.
Goldstein’s story is headlined, ambitiously:
Special Report: A Marshall Plan for America’s housing woes
And it aims high:
Reuters found that after talking to nearly two-dozen housing experts, mortgage traders, lawyers, securities experts and others, there is broad agreement about what a solution to the mortgage crisis might look like. They say a fix must allow many borrowers to stay in their homes, compensate disgruntled mortgage investors and allow banks to take write down loans without causing a repeat of the financial crisis of 2008.
Goldstein zeroes in on home-equity loans as the key sticking point in any fix for the crisis:
Still, housing and banking experts say it’s the potential for large losses on home equity loans that has rendered the mortgage crisis so intractable. After being propped up by U.S. taxpayers and then spending the past year building up capital, banks are hardly pining to take another round of writedowns and charges.
“To ultimately resolve this, you are going to have to come up with some solution for the second liens the banks own,” said Bill Frey of Greenwich Financial Services, a firm that specializes in mortgage investing and which has been at the forefront of fighting for the rights of institutional investors. “No one wants the banks to fail, but the banks are going to have to write down second liens.”
One solution for dealing with the home equity loan issue would be for the regulators to allow banks to spread out the writedowns over many years, said some of the people Reuters spoke to. Another fix would be to force the banks to take the hit at all once, but have the government provide a loan that is paid down each quarter from the bank’s reserves.
But the experts Reuters talked to said once banks are forced to deal honestly with their home equity liability, it makes it easier for other parties to take their lumps as well and come up with creative solutions to the mortgage mess.
I like the ambition Reuters shows here. Would that the administration, banks, and investors would show something similar. The American system seems so broken that it’s hard to imagine getting all these parties to agree on anything.
But it’s surely worth pointing out how it might be done.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.