The Powers of the Federal Government to Fix the Housing Crisis
The heart of the U.S. credit and economic crises is still the housing crisis, namely the drop in housing values in the major metropolitan areas that amounts to about 20% of peak values. This has left about 25% of all homeowners with zero or negative equity in their properties. That means many lenders are insolvent due to the drop in values of their mortgages, especially second mortgages, and many investors in mortgage securities of all kinds have lost trillions in value. There's no way to quickly restore housing values to their peak of late 2006 through early 2007. That could only be done with a program of deliberate and massive inflation that would probably make the economic crisis much worse in the near term.
The only rational solution that can fix the mortgage problem is to reduce the principals of mortgages. Most citizens object to the concept of just modifying the principals of mortgages by any means with no cost to the homeowners. Furthermore, such an approach severely damages the lenders' balance sheets which means more bank closures and lender bankruptcies. The only other approach to reduce mortgage principals would be to replace a significant portion of mortgage debt to a form that is not secured by the properties and would be much easier for consumers to manage over the longer term. That approach would automatically restore value to the remaining mortgage principals on lender balance sheets, automatically provide liquidity to lenders to restart lending, and would automatically restore value to mortgage securities so investors could resume investing in all types of securities, mortgage or otherwise. We have provided such an effective, practical, fast-acting plan, The AllStreets Bailout Plan, that would fairly benefit all Americans who own property and have a mortgage, or not.
Who could provide such lending? Only the federal government has the resources to do that. President Obama has repeatedly pointed out that only the federal government has sufficient resources to solve the massive financial and economic problems that plague the U.S. now.
In addition, it would be extremely helpful if the federal government would finally take action to directly modify the usurious terms of any subprime ARMs that still exist. The subprime ARMs started the housing problem and the bulk of all foreclosures now in process still involve such loans due to their high payments resulting from huge interest rate adjustments that still haven't been relieved by lenders through voluntary loan modifications (in fact, government data show that of all the loans modified through December, 2008, fully 47% of them result in higher, not lower, payments!).
But does the federal government have the power to conduct such lending or to modify the terms of subprime ARMs?
Yes, either Congress or the President has such power.
The Supreme Court ruled in 1934 in the case of Home Building and Loan, Ltd, versus Blaisdell that governments have the power to modify private contracts when it is necessary to protect the general welfare. The ruling was directly germane to the present housing, financial and economic crises. The case involved a Minnesota Foreclosure Moratorium Law in order to stem the avalanche of foreclosures during the Great Depression (when fully 50% of all homeowners lost their homes). The law gave district courts the power to suspend foreclosure proceedings and modify the terms of the mortgage to keep the owner in the home.
Furthermore, many observers have expressed skepticism that Congress would pass the necessary legislation to modify subprime ARMs or to initiate a program of direct lending to consumers such as the AllStreets Bailout Plan. Unfortunately that has been true so far because financial services lobbyists have short circuited or watered down almost all the efforts of Congress to effectively address the housing crisis by modifying subprime AMs or reducing mortgage principals. Well, if that's the case, then President Obama actually has the power to do what is necessary and desirable all by himself under his Emergency Economic Power. In fact, even if Congress was inclined to pass legislation accomplishing the recommended programs, it might be advantageous for the President to act alone first anyway, since he could get the programs started much faster than Congress.
The only rational solution that can fix the mortgage problem is to reduce the principals of mortgages. Most citizens object to the concept of just modifying the principals of mortgages by any means with no cost to the homeowners. Furthermore, such an approach severely damages the lenders' balance sheets which means more bank closures and lender bankruptcies. The only other approach to reduce mortgage principals would be to replace a significant portion of mortgage debt to a form that is not secured by the properties and would be much easier for consumers to manage over the longer term. That approach would automatically restore value to the remaining mortgage principals on lender balance sheets, automatically provide liquidity to lenders to restart lending, and would automatically restore value to mortgage securities so investors could resume investing in all types of securities, mortgage or otherwise. We have provided such an effective, practical, fast-acting plan, The AllStreets Bailout Plan, that would fairly benefit all Americans who own property and have a mortgage, or not.
Who could provide such lending? Only the federal government has the resources to do that. President Obama has repeatedly pointed out that only the federal government has sufficient resources to solve the massive financial and economic problems that plague the U.S. now.
In addition, it would be extremely helpful if the federal government would finally take action to directly modify the usurious terms of any subprime ARMs that still exist. The subprime ARMs started the housing problem and the bulk of all foreclosures now in process still involve such loans due to their high payments resulting from huge interest rate adjustments that still haven't been relieved by lenders through voluntary loan modifications (in fact, government data show that of all the loans modified through December, 2008, fully 47% of them result in higher, not lower, payments!).
But does the federal government have the power to conduct such lending or to modify the terms of subprime ARMs?
Yes, either Congress or the President has such power.
The Supreme Court ruled in 1934 in the case of Home Building and Loan, Ltd, versus Blaisdell that governments have the power to modify private contracts when it is necessary to protect the general welfare. The ruling was directly germane to the present housing, financial and economic crises. The case involved a Minnesota Foreclosure Moratorium Law in order to stem the avalanche of foreclosures during the Great Depression (when fully 50% of all homeowners lost their homes). The law gave district courts the power to suspend foreclosure proceedings and modify the terms of the mortgage to keep the owner in the home.
Furthermore, many observers have expressed skepticism that Congress would pass the necessary legislation to modify subprime ARMs or to initiate a program of direct lending to consumers such as the AllStreets Bailout Plan. Unfortunately that has been true so far because financial services lobbyists have short circuited or watered down almost all the efforts of Congress to effectively address the housing crisis by modifying subprime AMs or reducing mortgage principals. Well, if that's the case, then President Obama actually has the power to do what is necessary and desirable all by himself under his Emergency Economic Power. In fact, even if Congress was inclined to pass legislation accomplishing the recommended programs, it might be advantageous for the President to act alone first anyway, since he could get the programs started much faster than Congress.
Posted by The Mortgage News at 2/16/2009 5:57 PM 
Categories: Credit Crisis,debt crisis,foreclosure crisis,subprime ARM,Wall Street bailout,AllStreets Bailout Plan,mortgage crisis,government bailouts,Subprime Loans,Mortgage Legislation,mortgage modification,Main Street bailout,subprime crisis
Categories: Credit Crisis,debt crisis,foreclosure crisis,subprime ARM,Wall Street bailout,AllStreets Bailout Plan,mortgage crisis,government bailouts,Subprime Loans,Mortgage Legislation,mortgage modification,Main Street bailout,subprime crisis
Part of the financial industry problem is the threatened imposition of the new mark-2-market (MTM) rules. These rules eliminate any future lending if the markets are disrupted. How can a bank make any loan that they have to immediately mark down?
For example - a bank negotiates a $1 million jumbo, immediately marks it down to $600,000 and ask for more TARP money. Or they could sell this "toxic asset" at a discount to a hedge fund, where it receives more leverage and becomes a "legacy asset".
Banks make loans based on cash flow. They need to be able to hold the loans based on a similar valuation method.
In other words, your plan, which does have good points, does not have a prayer of working until the Federal Government stops pushing the new restrictive accounting measures on the banks.
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Thanks for your comment. The AllStreets Bailout Plan doesn't depend in any way on the accounting rules for banks or any other corporation. The government would be the bank. All the loans are automatic, and not underwritten. They're secured by the tax system, not the real estate. Under the plan, roughly $1.9 trillion or 15.6% of the $12.2 trillion of total residential debt is paid off, and all of that goes right into the lenders. Due to the outright reduction in loan principal, and consequent big improvement in loan-to-values, all collateralized debt securities would rise in market value . In addition borrowers payments would be recast, so the odds of default on the average loan would also decline, and that should contribute to improved market values. In addition, the banks will have all that cash availble for new loans, and half will be owed to the government at 3% for 30-years, cheap Tier 1 capital. Similar effect would be felt in the areas of collateralized car loans and credit card debt.
As you point out, to fully solve the balance sheet problems of banks' and other corporations holding collateralized debt securitiesit's necessary to have an accounting system that more realistically values the securities than is the case with mark-to-market rules. I'm not an expert on bank accounting, however, I can offer a couple of comments that you might find useful, even it it's just a starting point to do a little more research.
First, it's my understanding that the mark-to-market rules for multi-obligor securities are about to be eliminated, or significantly altered, not imposed. The new accounting rules will allow more realistic valuation by taking into account likely yield to maturity net of likely defaults as well as trading market value (market impairment). Multi-obligor debt securities are a bundle of debts that have separtate entities obligated to pay on them, such as a collaterized mortgage security ("MBS"), as opposed to a single-obligor security, such a corporate bond, that has only one obligated party. It's my understanding that the bond rating systems used to value such securities was never suitable, and the way they were applied had a lot to do with ruining their market values. There was a good discussion of this issue on an article at The Big Picture website by a real expert in the subject (sorry, I don't have time to locate the link at the moment) . He explained that one of the big problems that contributed to the credit crisis is that the debt rating agencies apply their classic single-obligor bond rating systems to the collateralized debt securities. The way the systems work is that a AAA security is rerated all the way to junk if there's just $1 expected to be lost! Once they're rated as junk none of the big fund managers can buy them for most accounts, and the mark-to-market rules make the holder write down the value. That's what happended to even AAA mortgage-backed securities, so they now trade around 30 cents on the dollar, as if 70% of the mortgages are worthless!! (By the way, The New York Post reported Sunday that Bank of America and Citi Group are outbidding all others and snapping up these AAA securities ahead of the change in mark-to-market and the new bad bank plan.) They'll make billions in profit on these purchases (being made with taxpayer TARP funds) when they apply the new accounting rules, or alternately they can sell them at the new higher market value to buyers funded by the government! What a racket.
Secondly, new loan securities are not necessarily immediately being marked down, because they are not the ones in default. If they were securitized privately, then that security would be subject to the mark-to-market problem at least until the rules change. However, there's little or no private securitization being done, as I understand it, because the non-government securitizing entities (offshore subidiaries of many large financial corporations) can't repay billions of dollars in short term debt to the money market funds that lent them funds to to finance leveraged purchases of the loans to create the debt secuities (borrow short, lend long...no, no, no, no!). However, new loans are bought and securitized by Fannie and Freddie or Ginnie Mae, and those are government insured, and the underwriting of those loans is very much better than old loans, so I don't think they have the market value problems. Hedge funds, mutual funds and ETFs are still buying them, I think, but I'm not sure if pension funds do.
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