An unlikely source has entered the mortgage crisis fray offering assistance to mortgagors (i.e., the people who took out mortgages to purchase their homes, not the lenders and others who hold the mortgages): the FDIC (Federal Deposit Insurance Corporation, for long), which is proposing to use $25 Billion of the $700 Billion TARP (Troubled Assets Relief Fund, for short) to prevent millions of foreclosures by offering incentives to banks to lower mortgage payments for homeowners. Naturally, Hank “Goldman Sachs and Morgan Stanley are My Co-Pilots” Paulson hates the idea:
Officials at the Federal Deposit Insurance Corp. yesterday detailed a plan to prevent 1.5 million foreclosures in the next year by offering financial incentives to companies that agree to sharply reduce monthly payments on mortgage loans.
The proposal, which has the support of leading congressional Democrats, would considerably expand the scope and force of the government’s efforts to stem foreclosures. Agency officials estimated the cost to the government at $24.4 billion.
FDIC Chairman Sheila C. Bair continues to face opposition within the Bush administration. Treasury Secretary Henry M. Paulson Jr. said Wednesday that he opposed funding the plan from the government’s $700 billion financial rescue fund, which has been used primarily to rescue banks and encourage lending. FDIC officials say they are still in talks with the Treasury, but proponents increasingly view the Bush administration as a roadblock with an expiration date.
“We think it’s essential that we actually strike at the underlying cause of the problems in the financial markets,” said Michael Krimminger, special adviser for policy at the FDIC. “We think it’s time to make a decisive difference in the housing markets on foreclosures.”
The FDIC proposal, which is scheduled to be announced today, goes farther toward helping borrowers than existing modification efforts. At the same time, the initiative is designed to be less expensive for mortgage companies because the government would pick up part of the tab. […]
“It is confounding to me why the Secretary of the Treasury and others refuse to understand that this is the heart of the problem,” [Senator Chris] Dodd said. “Until we solve the foreclosure problem, we will not have any hope of solving the larger problem.”
Many economists believe the economy will continue to suffer as long as the pace of foreclosures keeps home prices from stabilizing.
Hank “I can piss away BILLIONS with the best of them” Paulson and the Bush administration don’t want to help ordinary, everyday people in danger of losing their homes. They don’t want to prevent mortgage foreclosures which further depress the real estate market, cripple any chance of recovery by the construction industry and put families out on the street. They want to purchase shares in banks, and other financial institutions (like AIG) instead, institutions which aren’t lending the money which is being invested by the government, but which are taking those TARP funds and paying their executives Billions of $$$ in bonuses or using them to acquire other banks. How this helps the economy or solves the international credit crisis is beyond me.
What the FDIC officials are proposing makes sense. The best way to preserve the value of the homes which support these mortgages (and other homes in their neighborhoods whose value will decline if foreclosures continue) is to keep families in them. Families paying something on their mortgage debt is vastly superior to bank foreclosures and selling the properties at fire sale prices to speculators. Lowering mortgage payments for these families would also free up monies for other expenses (food, consumer goods, etc.) which would provide some benefit to the economy at large. Money not spent on mortgage payments would be recycled throughout the economy numerous times, and that could mean the difference between companies and businesses filing bankruptcy and/or going put of business (with the millions of job losses that would entail) or staying in business and preserving those jobs.
Color me stupid, perhaps, but don’t more unemployed people and more failed businesses mean less gross domestic product and therefore fewer good customers, consumer and corporate, for banks? And don’t those business failure and job losses prolong the recession/depression we are in and make the likelihood of a strong recovery less and less likely? Indeed, don’t increases in business failures and unemployment risk the further collapse of the international economic order with consequences too dire to contemplate? Like, say, a further collapse of global stock and equity markets, the inability of governments to raise monies in the bond markets, and even the return of the barter system in international trade?
I don’t know if the FDIC’s proposal, by itself, is enough to stem the tide of foreclosures roiling the US real estate market, foreclosures at the heart of the credit crisis, but it seems to me it represents a step in the right direction. I suspect we should also modify the current bankruptcy laws to allow bankruptcy courts to rewrite the terms of home mortgages so that both homeowners and lenders can benefit. Other measures such as a mortgage foreclosure moratorium may also be needed.
Still, at $25 Billion, the FDIC’s “big idea” seems like a drop in the bucket compared to the billions we are wasting each month to occupy Iraq, or which Wall Street’s mismanaged financial companies will pay from their government handout to “retain” their overpriced and incompetent “talent” otherwise known euphemistically as “senior executives” and “investment bankers.” I can’t see how giving the stupid, arrogant rich people on Wall Street more “free money” to play around with helps the economy half as much as helping out millions of members of the middle class on which our economy depends.
But then I’m not a Republican and former Wall Street executive masquerading as the Secretary of the Treasury, am I?
Bonus Question: This is for all you right wing defenders of unfettered capitalism and business libertarianism (as opposed to cultural libertarianism). Which would you prefer: “Socialism” for Wall Street (i.e., the Bush plan) or “socialism” for “Joe the Whatever” (the FDIC plan)? Or would you prefer that both Wall Street collapse and ordinary Americans lose their homes in the interest of ideological purity? Your call.
