Day: October 9, 2008

Mortgage Restructuring at Countrywide

We and other commentators have been saying that in addition to shoring up banks, there needs to be something for the homeowners at the bottom of the food chain. This will need to be a priority for Congress when it convenes in November (as it absolutely must, at this point) and for the next president. However, today, there may have been a small step in the right direction. Bank of America (which bought Countrywide) announced a “homeownership retention program” for customers of Countrywide, which was one of the most aggressive subprime lenders during the housing bubble.

The agreement, which was negotiated with several state attorneys general (who have been investigating Countrywide’s allegedly predatory lending practices), includes several provisions that offer hope to struggling homeowners:

  • Restructuring of first-year payments to target 34% of household income
  • Interest rate reductions
  • Principal reductions for some types of loans
  • Waivers for some loan modification and prepayment fees
  • Partial moratorium on foreclosure proceedings for borrowers who may be eligible for the program
  • $220 million in assistance for homeowners facing foreclosure

The program is supposed to go into effect on December 1. In total, it is expected to provide $8.4 billion in payment relief to homeowners. Of course, a lot will depend on how it is implemented, but at least this time (as opposed to the largely ineffectual HOPE program announced a while ago) there will be a set of attorneys general monitoring the program.

One major potential stumbling block is that “some loan modifications … will require investor approval” – meaning that if a mortgage has been securitized, all of the people who own bits and pieces of that mortgage may have to approve any modifications. This is why systematic government intervention is necessary to force people – if necessary and legal – to participate in loan modifications that do benefit all parties (investors get more than they would get in case of foreclosure; homeowners get to stay in their houses, perhaps just as renters; communities are not devastated by foreclosures). But while waiting for that to happen, this can’t hurt. Most importantly, it shows the recognition (under pressure, of course) by a major player that it is not going to get all of its money out of its borrowers, and that it is better off trying to find a win-win solution.

Paulson’s Bank Recapitalization Plan

The big news today is that Henry Paulson claims to have found, in the $700 billion TARP package passed last Friday, the power to invest some of that money directly in banks to shore up their capital. As one of the people who actually read the bill (OK, I skimmed most of it), I was puzzled by this, because my reading (like everyone else’s) was that Treasury would only be allowed to take equity stakes in companies who participated in the sale of troubled assets to Congress. However, if you look at the comments by Congressmen in the Time article and on Calculated Risk, you’ll see that there are statements in the Congressional record saying that the intent of the bill is to allow direct equity purchases. A curious fact that you learn in law school is that, in interpreting a bill, it is not just the words of the bill that matter; the record of committee and floor discussions can also be used in interpreting a bill. So it seems like, in this case, Congress consciously inserted language into the discussion in order to give Treasury this power, or Treasury is seizing on some passages in the discussion to claim that power.

At this point this is unlikely to generate too much controversy, because most people involved, including the authors of this blog, think it would be a good thing for Treasury to take some of the $700 billion and invest it directly in recapitalizing banks (which is what the UK is doing). Of course there will be issues of detail to be worked out, and the Treasury Secretary has an awful lot of discretion in this matter, but this is definitely a step forward.

Oh, and I should mention: Planet Money broke this story first.

More Economists for Coordinated Recapitalization and Debt Guarantees

The Center for Economic and Policy Research has rushed out, and I mean that in the best sense of the term, a survey of economists’ recommendations for the world’s economic policymakers and, specifically, for the meeting of G7 finance ministers this week. The economists who contributed to the 40-page report (once there, click on the title to download the PDF), while presenting a range of views, generally agree on the need to recapitalize the banking sector and, with some dissent, to guarantee short-term bank liabilities in order to calm fears in the financial markets. They also agree on the urgent need for coordinated action across countries. These are positions we have been advocating on this site, and we are glad to see many other people on the same page.