The real Bush mortgage relief plan
CalculatedRisk writes:
A lot of people are very worked up over the idea that the New Hope Plan
is, in essence, the government mandating a kind of reneging on private
contracts (the PSAs or Pooling and Servicing Agreements that govern how
securitized loans are handled). I personally think you can all stand
down on that one. From what I have seen about the plan to date, it is
clear to me that it is in fact structured with the overarching goal of
making sure that it stays on the allowable side of the existing
contracts. I proceed from the assumption that nobody could write such a
convoluted and counter-intuitive plan if that wasn’t the goal. So
everyone who is thinking, “Gee, we’re violating contracts and we still
don’t get much out of it!” is thinking the wrong thing, in my view.
It’s more like “Gee, we don’t get much out of it when we don’t violate
contracts.”
The full post has more explanation than any sane person can follow, also see the NYT coverage. I don’t understand many of the details of the plan, but it seems like a push in the right direction, namely encouraging settlement within the previous contractual framework. That said, I don’t expect it to have a major positive impact.
Many critics would like to see more of a debt jubilee, but I keep thinking of two quotations reproduced over at Megan McArdle’s blog:
There are many nuances related to mortgages. For instance, if you
default, what are your rights in foreclosure? How can you redeem, and
when? But it wasn’t any nuances that tripped people up. "The monthly
payment is more than I can afford" is not a "nuance.". . the lesson here appears to be that if you see everyone else
borrowing well beyond their means, you should too, since the government
cannot credibly allow large numbers of homeowners to go into
foreclosure.
There are two main arguments for breaking the loan contracts. The first
is that we could limit human suffering. The second is that we could
forestall macroeconomic catastrophe. Put together, these arguments have captured many hearts and minds, but neither is very strong on
its own.
On the first, there are many better ways for our government to help
poor people. Maybe you respond: "The perfect should not be the enemy of the good," but I am sorry: keeping lower income people in homes and out of apartments is too far down the list of efficient transfers for that rhetoric to succeed. Can we now allow the perfect to be the enemy of the not-good? Contract-breaking is not an especially fair way to
help the poor, given that the very poorest probably never borrowed any
mortgage money in the first place, and the most responsible of the poor won’t get anything either. Should we also reimburse the non-wealthy for their unlucky investments in dot.com stocks? Go back to square one.
On the macroeconomic issues, there is a real chance of a cascading
credit crunch in the next few months. Having the federal government arbitrarily rewrite legally binding loan contracts will, if anything, make that problem worse rather than better. It will hurt bank capitalization, plus it will weaken confidence that future loan agreements will be left intact. Uncertainty is the enemy of lending. Further side effects include the savaging of the subprime loan market (currently most subprime loans are being repaid without incident, thus putting deserving borrowers into homes) and seriously curbing floating rate lending in the future.
If you think that the macroeconomic skies will fall from future
mortgage interest rate resets, I am willing to listen. But your case
had better be really really good, given the macro problems of the debt jubilee. Aid as you will, but don’t make it a tax on the lenders.
The foreclosures story combines a few popular memes: lower income people suffering, possible macroeconomic
catastrophe, and a fair amount of misleading salesmanship (can I get my money back for having bought a computer with Vista?). But if we adopt widespread contract abrogation as the intended solution, I truly fear for the future of this republic.
Addendum: Here is testimony by Randall Kroszner, via Greg Mankiw. And Arnold Kling has a very good and lengthy analysis.