Cramdown Jam Part Deux
Solutions often cause new problems. Economics solutions invariably create dismal science side-effect issues. Economic policy solutions cobbled together by Capitol Hill concessioneering engender issues with attitude. Bad attitude.
There are only two kinds of criticisms of President Barack Obama’s multi-pronged aspirations to “stop the downward spiral” of home prices, keep people in homes they can pay for [with a little help from their friends, the U.S. taxpayer], and restore some balance to housing’s convulsing economy. One is that he’s not doing enough. The other is that he’s doing too much.
Among housing economy experts, the key deficiency of the Obama Housing Affordability and Stabilization Plan is that it did not get at mortgage principal reductions–thereby obviating the potential effectiveness of mortgage rate buydowns contained in the strategy.
Debate about the consequence of principal reductions–the side-effects or estuarial run-off of the economic solution that they’d offer–focuses on their immediate economic efficacy and their related psycho-behavioral ramifications.
Importantly, we’re faced with urgency in understanding economics — both the math of it and the social implications of it — to a greater degree than most of us thought we’d ever have to. It’s fortunate, then, that there are places to turn for clear, accessible explanations and insight on a series of complex issues and events.
One such resource is Macroblog–done by the Atlanta Fed–which has a recent post that opens up and illuminates the mysteries of loan modifications’ impacts for those who are economically dumb as a doorknob, which includes us.
Here’s part of a Macroblog Kristopher Gerardi, research economist and assistant policy adviser at the Atlanta Fed, did on ” Foreclosure Mitigation: What We Think We know.”
Many borrowers might have been able to afford their mortgages while employed but can no longer do so after they have lost their jobs. When housing prices are rising and homeowners enjoy positive equity, then distressed borrowers are able to sell their homes to pay off their mortgages. Alternatively, such borrowers can undertake cash-out refinances to gain some much-needed liquidity. Note that problems can occur for people in this situation even when positive future equity is a realistic hope. If the borrower is unemployed and liquidity constrained, the cost of waiting to default is very high and potential future price gains are of little value. Default in this case is much more likely, even though future prospects might be reasonably good. In this case, foreclosure-prevention policy could simply be used to eliminate the financial friction. In this case a lender would offer “forbearance,” in which the borrower pays significantly lower payments for some period, with the arrears made up (with interest) later on. In this light, it is notable that the administration’s key payment reduction plan has a five-year window.
However, one important concern regarding the plan is that servicers/investors don’t have enough incentives to substantially decrease current DTI ratios. For example, if a household has a DTI of 60 or 70 because of a job loss, the servicer is responsible for modifying the loan to get DTI down to 38 and then still has to kick in a 50 percent match to further reduce it to 31. The costs borne by the servicer/investor are much larger than those borne by the government, which may not be such a bad thing in principal but in practice may result in low participation rates.
Now, about giving bankruptcy judges license to modify loans for homeowners who file for Chapter 13 protection, you can now give the matter more thought and with the insight of the Macroblog, you can weigh in more knowledgeably about which side-effects of the cramdown issue you want to throw your support behind.
Here’s an update from The Wall Street Journal on the status of Congress’s debate about cramdowns.
The legislation’s fate remains up in the air after Democratic leaders last week postponed a vote on the measure until Tuesday after support softened among some of the rank-and-file. That vote is now likely to happen no earlier than Wednesday due to a snowstorm that disrupted the House schedule.
According to one person familiar with the matter, Democrats may push consideration of the measure until later in the week in order to allow time to hash out a compromise with the measure’s Senate sponsor, Sen. Richard Durbin (D., Ill.)
Led by Rep. Ellen Tauscher, (D., Calif.), a group of centrist pushed last week to lengthen from 15 to 30 days the advance warning borrowers must give to lenders before seeking a judicial modification. Borrowers would also have to prove they provided the lender with statements of income, expenses and debt.
But many Democrats still have misgivings about the bill, with 26 voting Thursday against a related procedural motion, which has spurred the fresh talks.
Lawmakers from conservative districts remain wary of supporting legislation they fear will be watered down by the Senate. Republicans, who largely oppose the measure, hold considerable sway in the upper chamber.
Stay tuned.
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