Loan Workouts, Not Bailouts!

[Moe Bedard]

I track all the news coming out daily in regards to the mortgage and housing crisis. Daily all I hear is reports of forclosures up in Denver, Co., Stockton, Ca., etc. The reports never change, only the cities. Very rarely do I get good information that is helpful or unique.

I was just reading an article from Paul Krugman of the New York Times (read it here) and it seems like he is one of the few journalists that knows what they are talking about.

Here are a couple of excerpts from that article that I really liked and thought I would share with everyone:

Many on Wall Street are clamoring for a bailout -- for Fannie Mae or the Federal Reserve or someone to step in and buy mortgage-backed securities from troubled hedge funds. But that would be like having the taxpayers bail out Enron or WorldCom when they went bust -- it would be saving bad actors from the consequences of their misdeeds.

I also think a bailout is not the answer to this mess. I've said it before and I'll say it again. Massive loan workoutsand loan modificationsof these exotic and toxic mortgages is needed and congress may need to force lenders and servicers to get their acts together and fix these ARM's that are killing our economy.

Yet our desire to avoid letting bad actors off the hook shouldn't prevent us from doing the right thing, both morally and in economic terms, for borrowers who were victims of the bubble.

Most of the proposals I've seen for dealing with the problems of subprime borrowers are of the locking-the-barn-door-after-the-horse-is-gone variety: They would curb abusive lending practices -- which would have been very useful three years ago -- but they wouldn't help much now. What we need at this point is a policy to deal with the consequences of the housing bust.

I also think Paul Krugman is right on with the statements above. Fixing the cause of the problem only helps in the future but it does nothing to help the problem that is already here. We need solutions to the massive mortgage and housing crisis that we have, now!

And we've done this sort of thing before -- for Third World countries, not for U.S. citizens. The Latin American debt crisis of the 1980s was brought to an end by so-called Brady deals, in which creditors were corralled into reducing the countries' debt burdens to manageable levels. Both the debtors, who escaped the shadow of default, and the creditors, who got most of their money, benefited.

The mechanics of a domestic version would need a lot of work, from lawyers as well as financial experts. My guess is that it would involve federal agencies buying mortgages -- not the securities conjured up from these mortgages, but the original loans -- at a steep discount, then renegotiating the terms. But I'm happy to listen to better ideas.

I really don't think that the mecahnics of implementing loan workouts and loan modifications is something that is going to need a lot of work.

All the borrowers that are in adjustable rate mortgages that have already adjusted and or are about to, need to be looked to determine the borrowers ability to pay (using debt to income ratios). If it is determined that they will not be able to afford this payment then that loan needs to be modified immediately.

Simple yet effective!