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Republicans say "Not so fast" on bailout

Sandhusker

Well-known member
NEW YORK (CNNMoney.com) -- The congressional negotiations over the proposed $700 billion bailout of the financial system were set to resume on Friday - a day after hours of talks ended in a partisan divide.

With President Bush warning that the nation's economy was facing a grave risk if a rescue plan is not enacted, a White House meeting with lawmakers and the presidential candidates revealed a deep split between Democrats and House Republicans.

Late-night talks between lawmakers and Treasury Secretary Henry Paulson - which were being conducted while federal banking regulators and executives were announcing the seizure and sale of Washington Mutual after the biggest bank failure in history - failed to reach agreement.

Rep. Barney Frank, D-Mass., the lead House Democrat on the issue who had been in close talks with Paulson for days, accused Republicans of refusing to negotiate.

"At this point, we have absolutely no participation or cooperation from House Republicans," Frank said.

While talks are set to resume Friday morning, any hopes of a clean, bipartisan legislative effort have broken down and the prospect of emergency weekend work on Capitol Hill looms large.
Agreeing on principles

Earlier in the afternoon on Thursday, the mood on on Capitol Hill was very different.

Frank, Sen. Christopher Dodd, D-Conn., and other key lawmakers negotiating with Paulson announced that they had reached agreement on a set of principles for legislation to enact the historic proposal.

The bailout proposal - the most dramatic government intervention in the financial system since the Great Depression - calls for the Treasury Department to buy up bad mortgage securities from banks in an effort to get them to lend again.

The proposal, as amended by leaders in both chambers, will help homeowners, curb executive pay packages at participating firms and provide oversight of Treasury's actions, Dodd said in a lunchtime address.

"We've reached a fundamental agreement on a set of principles, one, for taxpayers, which is tremendously important," he said. "We're very confident we can act expeditiously."

A few hours later, after a widely anticipated White House meeting at which Bush said he expected a deal could be crafted "very shortly," the negotiations had broken down.
Details on the plans

The principles the Democrats said had been agreed upon call for Congress to make $250 billion available immediately with $100 billion available, if needed, without requiring additional congressional approval, said two senior Democratic aides familiar with the negotiations. The second half of $350 billion would then become available by a special approval of Congress.

On executive compensation, the draft would require limits on compensation for executives of any company participating in the bailout. These caps would apply for as long as the company is in the program. This would include some language to limit excess "golden parachutes."

Treasury would also get an equity stake in the companies being helped by the bailout, though what type remains to be worked out.

But House Republicans are not on board, according to Minority Leader Rep. John Boehner, R-Ohio.

"House Republicans have not agreed to any plan at this point," Boehner said Thursday.

Instead, they issued a statement of economic rescue principles that calls for Wall Street to fund the recovery by injecting private capital - not taxpayer dollars - into the financial markets. Easing tax laws would prompt investors to put in their own dollars, they said.

The plan also calls for: participating firms to disclose the value of the mortgage assets on their books, ending Fannie Mae and Freddie Mac's securitization of "unsound mortgages," reviewing the performance of the credit rating agencies and having the Securities and Exchange Commission audit failed companies to ensure their financial standing was accurately portrayed.

House Republicans also want to create a panel to make recommendations for reforming the financial industry by year's end.

Meanwhile, the ranking Republican on the Senate Banking Committee has another idea. Sen. Richard Shelby, R-Ala., said he doesn't support the Treasury plan until there is serious consideration of alternatives. He proposed Thursday adding funds to the Federal Reserve and Treasury to allow them to lend more to financial institutions.
 

Texan

Well-known member
Looks like the Dems are wanting to go along with that big-spending liberal George W. Bush. With the Dems in control, it's obvious that we're just going to have more of the same. :lol:
 

alice

Well-known member
Excess golden parachutes....excess pay packages. What is considered excess? Like instead of $25 million...$20 million? Why do I think these golden parachute/excess pay package recipients are still gonna come out flush?

Granted I don't know the ins and outs, but I think anything over a dollar to the golden parachute/excess pay package recipients is excessive.

Alice
 

backhoeboogie

Well-known member
Fannie and Freddie are too big. Bailing them out doesn't result in sound long term security.

ARe we setting precedence for everything else? Did we already set precedence with insurance?

Do you think that those consumers who are in default should keep their homes and other toys such as boats and new cars that they can't pay for? You have already seen them on the television crying that is is not their fault. They blame the system. Did you note their jewelry and dress?

We need a well thought out and thorough plan.
 

Texan

Well-known member
alice said:
Excess golden parachutes....excess pay packages. What is considered excess? Like instead of $25 million...$20 million? Why do I think these golden parachute/excess pay package recipients are still gonna come out flush?

Granted I don't know the ins and outs, but I think anything over a dollar to the golden parachute/excess pay package recipients is excessive.

Alice

I think that's the key question that needs to be spelled out in detail. If it's left in ambiguous terms, they'll find a way to get around it.

I normally don't believe in limiting anybody's pay or profits - in the case of a money-making business. If Exxon wants to pay their CEO a gazillion dollars, I don't think that's anybody's business except the stockholders.

But if they're wanting taxpayer help, that makes it our business. Those SOB's need to make some big sacrifices if they expect the rest of us to.
 

Clarencen

Well-known member
I don't know a dang thing about high finance, but I think that some of our banks and insurance companies have gotten to big, this probably pretains to other businesses as well. When they fall out of the sky they leave a big, big crater.

In our system of free interprise there is no limit of how big you can get, so is there any reason for not premiting them to fail. Either way we are going to feel the pain. I just read Faster Horses post on coffee shop, maybe there is some comparison.
 

Sandhusker

Well-known member
alice said:
Excess golden parachutes....excess pay packages. What is considered excess? Like instead of $25 million...$20 million? Why do I think these golden parachute/excess pay package recipients are still gonna come out flush?

Granted I don't know the ins and outs, but I think anything over a dollar to the golden parachute/excess pay package recipients is excessive.

Alice

I'll agree with you there. I would give them a box so they could clean out their office and that would be it.
 

backhoeboogie

Well-known member
Sandhusker said:
alice said:
Excess golden parachutes....excess pay packages. What is considered excess? Like instead of $25 million...$20 million? Why do I think these golden parachute/excess pay package recipients are still gonna come out flush?

Granted I don't know the ins and outs, but I think anything over a dollar to the golden parachute/excess pay package recipients is excessive.

Alice

I'll agree with you there. I would give them a box so they could clean out their office and that would be it.

I agree on the buy-outs but not on pre-agreed severance packages.

If severance packages factor in to employees taking their jobs, severance packages should be honored. Most of us are accustom to policies like 1 week's pay per year of employment as a severance package etc. Believe it or not, the amount of money paid to 30 year laymen on the assembly lines in severance could lift your eyebrows. (Some policies are significantly more than 1 weeks pay per year)
 

Sandhusker

Well-known member
Fine, give them one weeks pay. If they don't like those terms, they can get somebody else to bail them out. They're the ones who got themselves in this mess and beggars can't be choosers.
 

fff

Well-known member
What do we do about China?

Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding, a former adviser to the Chinese central bank.

``We are in the same boat, we must cooperate,'' Yu said in an interview in Beijing on Sept. 23. ``If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.''

An agreement is needed so that no nation rushes to sell, ``causing a collapse,'' Yu said. Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion. Asian countries together hold half of the $2.67 trillion total held by foreign nations.

China, Japan, South Korea and others should meet soon to seal a deal, said Yu, a former academic member of the central bank's monetary policy committee. The talks should involve finance ministers, central bank governors and even national leaders, he said.

``Whether some kind of agreement between them to continue to hold Treasury bills is viable, I'm not sure,'' said James McCormack, head of sovereign ratings at Fitch Ratings Ltd in Hong Kong. ``It would be unusual. If it became apparent that sovereigns in Asia were selling Treasuries the market would take that quite badly, it's something to be avoided.''

The global credit crisis, triggered by a housing slump in the U.S., has saddled financial companies with more than $520 billion in writedowns and losses, collapsing Bear Stearns Cos. and Lehman Brothers Holdings Inc. in the process. Insurer American International Group Inc. and mortgage giants Fannie Mae and Freddie Mac also were rescued by the government.

`Grave Threats'

U.S. Treasury Secretary Henry Paulson is urging Congress to pass a $700 billion plan to remove devalued assets from the banking system. Federal Reserve Chairman Ben S. Bernanke said Sept. 24 that the U.S. is facing ``grave threats'' to its financial stability.

China's huge holdings of U.S. debt means it must bear a large proportion of the ``burden of sorting things out'' in the U.S., Yu said. China is not in a hurry to dump its U.S. holdings and communication between the two nations every ``couple of days'' is keeping Chinese leaders informed and helping to avoid a potential panic, he added.

``China is very worried about the safety of its assets,'' he said. ``If you want China to keep calm, you must ensure China that its assets are safe.''

Currency Manipulator

Yu said China is helping the U.S. ``in a very big way'' and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said.

``It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that,'' he said. ``China knows what to do. We don't need your intervention.''

The U.S. financial crisis had taught China a lesson and that was: ``Why are we piling up these IOUs if they may default?'' China's economic expansion strategy, which emphasizes export growth that has led to trade surpluses and the accumulation of $1.81 trillion in foreign-exchange reserves, is the main problem, said Yu.

``Our export-growth strategy has run its natural course,'' he said. ``We should change course.''

China should stop intervening in the foreign currency markets and thus allow rapid appreciation of the yuan, he said. While this would cause pain for exporters, China could ease the transition by using its strong fiscal position to aid those who lose their jobs. It also should stimulate domestic demand to offset lower income from overseas sales.

Without yuan appreciation, China will continue to accumulate foreign reserves, which means further accumulating ``IOUs from the U.S.,'' said Yu. ``This is paper and it may default and it will not increase China's national welfare.''

If China doesn't allow the yuan to appreciate and continues to promote export-led growth it will lead to confrontation with the U.S. and Europe, Yu said.

To contact the reporters on this story: Kevin Hamlin in Beijing at [email protected]

Last Updated: September 25, 2008 01:45 EDT

http://www.bloomberg.com/apps/news?pid=20601087&sid=anZHfo6tQi60&refer=home
 

cutterone

Well-known member
How about the originating lender of these loans being forced to buy them back from the current holders and then forced to rewrite the mortgages for fixed, current loan rates, and with the provision that they can only foreclose is the new loan falls 90 days past due? They are the one's who wrote this crap, why not make them responsible!
 

cutterone

Well-known member
OUT IPosted: Friday, September 26 at 09:30 am CT by Bob Sullivan
It's the empty houses, stupid.

In case anyone has forgotten the core of the current economic crisis, here's a reminder: empty homes, both present and future. Empty homes are behind all the supposedly worthless mortgage-backed securities that no one wants to buy on Wall Street. Fear of the coming avalanche of empty homes -- what the Center for Responsible Lending calls the “tsunami of foreclosures” -- has made Wall Street’s mortgage-related paper nearly worthless.

It seems that filling those empty homes by dealing with foreclosures and stoking demand to buy homes should be the first order of business. So why -- as we discuss the most dramatic government intervention in nearly a century -- is there only passing mention of all these vacancies?


By every industry measure, foreclosure is a huge problem. Earlier this year, the financial services giant Credit Suisse estimated that there will be 6.5 million U.S. foreclosures during the next five years.

And even if you pay your mortgage on time, foreclosures will likely hurt you, too. Each time a family is kicked out of a home, there's collateral damage to the value of nearby homes. The Center for Responsible Lending says that the closest 50 homes lose an average of $3,000 in equity every time there’s a foreclosure. The organization estimates that 40 million families will lose nearly $350 billion in equity due to foreclosure collateral damage during the next five years.

The bleak outlook was published in April, which should make you wonder why Congress only became interested two weeks ago and then started acting with incredible haste. The crisis has been brewing for some time.

There are really two related but distinct economic crises facing America right now. There’s the liquidity crisis on Wall Street, which has us all breathlessly watching CNBC, and there’s the housing crisis, which is kicking 6,000 families per day out of their homes and is draining equity from the rest of the nation’s homeowners.

The liquidity crisis has superseded all other concerns in recent days, even the presidential campaign. Wall Street’s advocates, Henry Paulson and Ben Bernanke, generated enough panic that Congress appears willing to sign a check for $700 billion. For a while, those advocating for Main Street held out for a quid pro quo – immediate help with the housing market crisis -- but the resistance lasted less than a week.

'A game of chicken'

“This was kind of a game of chicken and I'm afraid it looks like the consumer advocates in Congress are the ones who blinked ,” said Adam J. Levitin, a bankruptcy expert at the Georgetown University Law Center.

Details of the not-quite-completed-bailout-plan are still emerging, but by all accounts it will not include the most obvious and direct tool to stem the empty house problem: adjustments to bankruptcy law that would allow judges to modify the mortgages of at-risk homeowners.
Such assistance could still materialize in Congress, but the Senate voted to reject the idea in April, spurred on by agressive bank lobbying. By agreeing to this bailout deal without fixing bankruptcy law, Main Street’s advocates have surrendered nearly all their leverage.

I understand the theory that giving banks more money to lend can ultimately help restart demand for housing by making it easier for consumers to get loans and, as demand increases, boosting housing prices. But isn’t that how we got here in the first place?

The proposal to help at-risk homeowners was simple: allow bankruptcy judges to rework loans (essentially, lower the mortgage principal and payments) to keep them in their homes and out of foreclosure. Sadly, supporters of the plan surrendered and instead focused on CEO pay -- a populist issue that's a distraction from the real problem of empty homes.

Critic sees bailout as 'unfair and ineffective'

"The only way to stop the free-fall of housing prices is to stop foreclosures," Kathleen Day, spokeswoman for the Center For Responsible Lending, warned. "If you don't do something for consumers, this is going to be unfair and ineffective."

The proposal to amend Chapter 13 bankruptcy law (the kind where debtors repay their loans, but buy time and get some discounts) is hardly revolutionary. Under Chapter 13, filers can rework all kinds of loans: car loans, vacation home loans, investment/rental property loans. But primary residence loans are exempt. Struggling homeowners face two choices in current bankruptcy law -- pay every penny or walk away. The limitation stems from a 1970s law that was intended to encourage banks to lend more money to would-be homeowners.

The simplest way to prevent the coming avalanche of additional empty homes -- and thereby make those asset-backed-securities have some real value -- is to prevent people from getting kicked out. It's stunning that $700 billion is about to change hands with no direct plan for keeping them in their homes.
There is the HOPE NOW alliance, set up by Congress this year to encourage at-risk homeowners and banks to renegotiate mortgages voluntarily. By all measures, it's been a failure. Banks aren't answering their phones when consumers call; trusts that service mortgages have perverse incentives in place that make foreclosure more profitable than renegotiated loans.
Allowing modification of home loans in bankruptcy would encourage banks to negotiate new terms, as it would allow the banks to avoid court costs and delays. Once bankruptcy courts set a few price points on modified loans, voluntary participation would likely follow.

The financial industry, which has long resisted modifying Chapter 13 bankruptcy, says that such a change would deal the mortgage-backed securities industry a body blow. Allowing judges to reduce the principal owed on a mortgage -- lenders call this a "cramdown" -- would lower the overall value of mortgage instruments, as a built-in bankruptcy discount would have to be applied, which would, in turn, harm consumers by restricting the flow of credit, banks say.

No sign of 'bankruptcy premium'

But Georgetown’s Levitin published a study last month that indicates that other loan markets are not adversely impacted by bankruptcy modification. There’s no difference in mortgage rates between primary residence loans and vacation residence homes, for example – and there would be if there were a “bankruptcy premium,” he said.

Levitin argues that proposed Chapter 13 bankruptcy changes would in fact be “market neutral.” Bankruptcy judges are well trained in determining consumers' ability to repay a loan, meaning many banks would get 50, 60, or 70 cents on the dollar, up to twice as much as they would realize after going through the costly foreclosure process, he said.

And neighbors would certainly agree that such a home loan modification would be preferable to another empty home.

"The contagion began on Main Street, and it has to be fixed there," said Day, from the Center for Responsible Lending. "You are not going to get at the root of this and really restore the economy until you stop all the foreclosures.”

Other empty home proposals

Even with the bankruptcy option, not all homeowners would be able to stay in their houses, and there are already millions of empty homes.

To address that problem, David Colander, a professor of economics at Middlebury College, has another idea. He wants part of the $700 billion bailout to go directly to U.S. consumers in the form of housing vouchers. The vouchers could be used to pay off loans, or even better, to persuade some renters to jump into the homeownership market. Nothing greases the housing market quicker than turning renters into owners, he said, calling it a "trickle-up policy."

"Unlike a tax cut, or a temporary stimulus fiscal package, this plan would have a directed effect on the housing market and hence on the mortgage backed securities market," he said.
If carried out in conjunction with a bailout of financial institutions, it would raise the value of securities purchased by the government because home values would rise as demand increases, Colander said.
To ensure the plan maximizes the purchase of primary residences -- as opposed to investment -- the vouchers would be income-based, under his plan.

Of course, such direct intervention into a market -- giving consumers free money -- contradicts long-standing free-market policies. But then, so does having the federal government purchase $700 billion in bad loans.
 

TexasBred

Well-known member
fff said:
What do we do about China?

Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding, a former adviser to the Chinese central bank.

``We are in the same boat, we must cooperate,'' Yu said in an interview in Beijing on Sept. 23. ``If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.''

An agreement is needed so that no nation rushes to sell, ``causing a collapse,'' Yu said. Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion. Asian countries together hold half of the $2.67 trillion total held by foreign nations.

China, Japan, South Korea and others should meet soon to seal a deal, said Yu, a former academic member of the central bank's monetary policy committee. The talks should involve finance ministers, central bank governors and even national leaders, he said.

``Whether some kind of agreement between them to continue to hold Treasury bills is viable, I'm not sure,'' said James McCormack, head of sovereign ratings at Fitch Ratings Ltd in Hong Kong. ``It would be unusual. If it became apparent that sovereigns in Asia were selling Treasuries the market would take that quite badly, it's something to be avoided.''

The global credit crisis, triggered by a housing slump in the U.S., has saddled financial companies with more than $520 billion in writedowns and losses, collapsing Bear Stearns Cos. and Lehman Brothers Holdings Inc. in the process. Insurer American International Group Inc. and mortgage giants Fannie Mae and Freddie Mac also were rescued by the government.

`Grave Threats'

U.S. Treasury Secretary Henry Paulson is urging Congress to pass a $700 billion plan to remove devalued assets from the banking system. Federal Reserve Chairman Ben S. Bernanke said Sept. 24 that the U.S. is facing ``grave threats'' to its financial stability.

China's huge holdings of U.S. debt means it must bear a large proportion of the ``burden of sorting things out'' in the U.S., Yu said. China is not in a hurry to dump its U.S. holdings and communication between the two nations every ``couple of days'' is keeping Chinese leaders informed and helping to avoid a potential panic, he added.

``China is very worried about the safety of its assets,'' he said. ``If you want China to keep calm, you must ensure China that its assets are safe.''

Currency Manipulator

Yu said China is helping the U.S. ``in a very big way'' and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said.

``It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that,'' he said. ``China knows what to do. We don't need your intervention.''

The U.S. financial crisis had taught China a lesson and that was: ``Why are we piling up these IOUs if they may default?'' China's economic expansion strategy, which emphasizes export growth that has led to trade surpluses and the accumulation of $1.81 trillion in foreign-exchange reserves, is the main problem, said Yu.

``Our export-growth strategy has run its natural course,'' he said. ``We should change course.''

China should stop intervening in the foreign currency markets and thus allow rapid appreciation of the yuan, he said. While this would cause pain for exporters, China could ease the transition by using its strong fiscal position to aid those who lose their jobs. It also should stimulate domestic demand to offset lower income from overseas sales.

Without yuan appreciation, China will continue to accumulate foreign reserves, which means further accumulating ``IOUs from the U.S.,'' said Yu. ``This is paper and it may default and it will not increase China's national welfare.''

If China doesn't allow the yuan to appreciate and continues to promote export-led growth it will lead to confrontation with the U.S. and Europe, Yu said.

To contact the reporters on this story: Kevin Hamlin in Beijing at [email protected]

Last Updated: September 25, 2008 01:45 EDT

http://www.bloomberg.com/apps/news?pid=20601087&sid=anZHfo6tQi60&refer=home

fff...the LAST thing China wants to do is start trying to sell the US securities they own. They might only get pennies on the dollar. In effect they would be in the same position as FNMA and FHLMC. Lots of money out and nothing with any value securing it.
 

aplusmnt

Well-known member
fff said:
Yeah, and you know how those Republicans feel about oversight, investigations and subpoenas.

Yea back in 2005 they wanted some of it for Fannie and Freddie, but you know how the Dem's are, they want regulation on successful companies that make money like the oil companies. But hell no, on regulating those that actually are failing like Fannie and Freddie.

Guess we see who is correct now though huh? A closer eye needs to be on these Social engineering projects that the Dem's like so much before they bankrupt the country!
 

fff

Well-known member
cutterone said:
OUT IPosted: Friday, September 26 at 09:30 am CT by Bob Sullivan
It's the empty houses, stupid.

In case anyone has forgotten the core of the current economic crisis, here's a reminder: empty homes, both present and future. Empty homes are behind all the supposedly worthless mortgage-backed securities that no one wants to buy on Wall Street. Fear of the coming avalanche of empty homes -- what the Center for Responsible Lending calls the “tsunami of foreclosures” -- has made Wall Street’s mortgage-related paper nearly worthless.

It seems that filling those empty homes by dealing with foreclosures and stoking demand to buy homes should be the first order of business. So why -- as we discuss the most dramatic government intervention in nearly a century -- is there only passing mention of all these vacancies?


By every industry measure, foreclosure is a huge problem. Earlier this year, the financial services giant Credit Suisse estimated that there will be 6.5 million U.S. foreclosures during the next five years.

And even if you pay your mortgage on time, foreclosures will likely hurt you, too. Each time a family is kicked out of a home, there's collateral damage to the value of nearby homes. The Center for Responsible Lending says that the closest 50 homes lose an average of $3,000 in equity every time there’s a foreclosure. The organization estimates that 40 million families will lose nearly $350 billion in equity due to foreclosure collateral damage during the next five years.

The bleak outlook was published in April, which should make you wonder why Congress only became interested two weeks ago and then started acting with incredible haste. The crisis has been brewing for some time.

There are really two related but distinct economic crises facing America right now. There’s the liquidity crisis on Wall Street, which has us all breathlessly watching CNBC, and there’s the housing crisis, which is kicking 6,000 families per day out of their homes and is draining equity from the rest of the nation’s homeowners.

The liquidity crisis has superseded all other concerns in recent days, even the presidential campaign. Wall Street’s advocates, Henry Paulson and Ben Bernanke, generated enough panic that Congress appears willing to sign a check for $700 billion. For a while, those advocating for Main Street held out for a quid pro quo – immediate help with the housing market crisis -- but the resistance lasted less than a week.

'A game of chicken'

“This was kind of a game of chicken and I'm afraid it looks like the consumer advocates in Congress are the ones who blinked ,” said Adam J. Levitin, a bankruptcy expert at the Georgetown University Law Center.

Details of the not-quite-completed-bailout-plan are still emerging, but by all accounts it will not include the most obvious and direct tool to stem the empty house problem: adjustments to bankruptcy law that would allow judges to modify the mortgages of at-risk homeowners.
Such assistance could still materialize in Congress, but the Senate voted to reject the idea in April, spurred on by agressive bank lobbying. By agreeing to this bailout deal without fixing bankruptcy law, Main Street’s advocates have surrendered nearly all their leverage.

I understand the theory that giving banks more money to lend can ultimately help restart demand for housing by making it easier for consumers to get loans and, as demand increases, boosting housing prices. But isn’t that how we got here in the first place?

The proposal to help at-risk homeowners was simple: allow bankruptcy judges to rework loans (essentially, lower the mortgage principal and payments) to keep them in their homes and out of foreclosure. Sadly, supporters of the plan surrendered and instead focused on CEO pay -- a populist issue that's a distraction from the real problem of empty homes.

Critic sees bailout as 'unfair and ineffective'

"The only way to stop the free-fall of housing prices is to stop foreclosures," Kathleen Day, spokeswoman for the Center For Responsible Lending, warned. "If you don't do something for consumers, this is going to be unfair and ineffective."

The proposal to amend Chapter 13 bankruptcy law (the kind where debtors repay their loans, but buy time and get some discounts) is hardly revolutionary. Under Chapter 13, filers can rework all kinds of loans: car loans, vacation home loans, investment/rental property loans. But primary residence loans are exempt. Struggling homeowners face two choices in current bankruptcy law -- pay every penny or walk away. The limitation stems from a 1970s law that was intended to encourage banks to lend more money to would-be homeowners.

The simplest way to prevent the coming avalanche of additional empty homes -- and thereby make those asset-backed-securities have some real value -- is to prevent people from getting kicked out. It's stunning that $700 billion is about to change hands with no direct plan for keeping them in their homes.
There is the HOPE NOW alliance, set up by Congress this year to encourage at-risk homeowners and banks to renegotiate mortgages voluntarily. By all measures, it's been a failure. Banks aren't answering their phones when consumers call; trusts that service mortgages have perverse incentives in place that make foreclosure more profitable than renegotiated loans.
Allowing modification of home loans in bankruptcy would encourage banks to negotiate new terms, as it would allow the banks to avoid court costs and delays. Once bankruptcy courts set a few price points on modified loans, voluntary participation would likely follow.

The financial industry, which has long resisted modifying Chapter 13 bankruptcy, says that such a change would deal the mortgage-backed securities industry a body blow. Allowing judges to reduce the principal owed on a mortgage -- lenders call this a "cramdown" -- would lower the overall value of mortgage instruments, as a built-in bankruptcy discount would have to be applied, which would, in turn, harm consumers by restricting the flow of credit, banks say.

No sign of 'bankruptcy premium'

But Georgetown’s Levitin published a study last month that indicates that other loan markets are not adversely impacted by bankruptcy modification. There’s no difference in mortgage rates between primary residence loans and vacation residence homes, for example – and there would be if there were a “bankruptcy premium,” he said.

Levitin argues that proposed Chapter 13 bankruptcy changes would in fact be “market neutral.” Bankruptcy judges are well trained in determining consumers' ability to repay a loan, meaning many banks would get 50, 60, or 70 cents on the dollar, up to twice as much as they would realize after going through the costly foreclosure process, he said.

And neighbors would certainly agree that such a home loan modification would be preferable to another empty home.

"The contagion began on Main Street, and it has to be fixed there," said Day, from the Center for Responsible Lending. "You are not going to get at the root of this and really restore the economy until you stop all the foreclosures.”

Other empty home proposals

Even with the bankruptcy option, not all homeowners would be able to stay in their houses, and there are already millions of empty homes.

To address that problem, David Colander, a professor of economics at Middlebury College, has another idea. He wants part of the $700 billion bailout to go directly to U.S. consumers in the form of housing vouchers. The vouchers could be used to pay off loans, or even better, to persuade some renters to jump into the homeownership market. Nothing greases the housing market quicker than turning renters into owners, he said, calling it a "trickle-up policy."

"Unlike a tax cut, or a temporary stimulus fiscal package, this plan would have a directed effect on the housing market and hence on the mortgage backed securities market," he said.
If carried out in conjunction with a bailout of financial institutions, it would raise the value of securities purchased by the government because home values would rise as demand increases, Colander said.
To ensure the plan maximizes the purchase of primary residences -- as opposed to investment -- the vouchers would be income-based, under his plan.

Of course, such direct intervention into a market -- giving consumers free money -- contradicts long-standing free-market policies. But then, so does having the federal government purchase $700 billion in bad loans.

Cutter, Republicans don't want to give any money or help to the homeowner. They want to give it to big business and let the benefits MAYBE trickle down to the little guy. I think you're right. Revalue the houses, rewrite the mortgages and set up something to help people make their payments to keep them current. If every house currently in foreclosure court were to go bad, it wouldn't cost anywhere near the $700 billion Bush asked for. But the lenders don't want to revalue the mortgages. They want you and me to pay them the face value, kick people out for not paying the monthly mortgage and resell them at the lower value! Wouldn't we all like a deal like that?
 
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