WHY DIDN’T THE GOVERNMENT JUST INTERVENE TO PAY OFF VULNERABLE MORTGAGES?

Sign of the times

FUNNY HOW THIS SEEMS TO HAVE OCCURRED TO NO ONE IN THE BUSH ADMINISTRATION–

but the waves of foreclosures that are said to have begun the current financial crisis, if it is one, could have been held back from the get-go. How? Simple: Through government intervention. If Uncle Sam was going to jump into the housing market with fistfuls of billions, he could have paid off selected mortgages. Here is what A. Maslow would call the hierarchy of needs in the current situation, as broad-brushed by this morning’s Washington Post: “In a practical sense, the government is trying to revive the markets because buying up all the troubled assets would require far more than $700 billion.

Twenty of the nation’s largest financial institutions owned a combined total of $2.3 trillion in mortgages as of June 30. They owned another $1.2 trillion of mortgage-backed securities. And they reported selling another $1.2 trillion in mortgage-related investments on which they retained hundreds of billions of dollars in potential liability, according to filings the firms made with regulatory agencies. The numbers do not include investments derived from mortgages in more complicated ways, such as collateralized debt obligations.”

Setting aside if one could how horrible all this is, what one notices is that

1. Mortgages themselves are less than half the total indebtedness: $2.3 trillion.

2. This $2.3 trillion number in mortgages is huge but comes to far less than the combined total estimated at $1.2 trillion in ‘mortgage-backed securities,’ plus $1.2 trillion in ‘mortgage-related investments’ ($2.4 trillion so far), plus ‘collateralized debt obligations’ with an unestimated paper value–thus probably about twice the rest of the Ponzi total. We can thus estimate a total in mortgage-backed financial mirages of somewhere around $5 trillion.

3. It should be pointed out that most mortgages are not in trouble. What proportion of these mortgages are commercial and what proportion are residential is not stated, but in any case, the overwhelming majority of people with mortgages are paying them. Notwithstanding the horrendous difficulties facing Detroit, in residential real estate one-third of all U.S. mortgages now in trouble are in California–where residential real estate prices went to vertiginous and unstable highs unrelated to concrete land values. (The West Coast is desirable, but it is not squeezed for space. It is not Hawaii.)

Back to basics.

If foreclosures were indeed what started the current problems, and if government intervention is warranted, then government should step in by paying off people’s mortgages. Help the people–homeowners–who really need the help. Help the city blocks and the streets in midsized towns that really need help. Stabilize the real estate markets by keeping nice people in their houses.

This remedy would have to be applied within limits, of course, and the Treasury Secretary would have to be given some latitude in picking his jurisdictions (counties or towns):

a) He could start with a short list of the hundred poorest zip codes in the United States and simply pay off troubled mortgages in those zip codes. Given house prices in the poorest regions, that assistance would amount to less than one percent of one percent of the dollar totals being bandied in Washington. He could then move on to another short list of the hundred next-poorest zip codes in the nation, and pay off the troubled mortgages in those zip codes. He could then progress up the list to the next hundred poorest zip codes in the U.S., and pay off the troubled mortgages there.

b) He could also start with a short list of the hundred zip codes in the U.S. with the highest foreclosure rates, and pay off troubled mortgages in those zip codes, proceeding as above in a).

c) He could also start with a short list of hundred zip codes in the U.S. where abusive lenders have done their worst–abusive ARMs, low-balling, etc.–and pay off the troubled mortgages in those zip codes, proceeding as above in a) and b).

Certain conditions would apply: The houses would have to be the mortgage holders’ primary and actual residences–not investment properties or second homes. The owners would have to have lived there some set number of years, say 3 years; to have made their payments up to some set point; to have made a good-faith effort, in other words, to meet their mortgage payments. There would have to be a cap on the mortgage balances to be paid off–no jumbo mortgages–and some cap on the income of householders eligible to receive the help–no millionaires.

This would be no single-pronged attack on the problem. It would have to accompany investigation and conviction for abusive lenders, a thorough crackdown on corporate fraud at all levels, and a stringent reining in of corporate waste–including lobbying, advertising and executive compensation. 

But surely the banks and other mortgage lenders would have little to complain about. After all, they would be getting their money, the money they lent via those mortgages, plus the hundreds of billions in interest already paid on the mortgages.

The only things not supported by government—taxpayers–would be those nebulous collateralized obligations and mortgage-backed securities, which they never should have invented in the first place.

What’s not to like?