News Analysis
http://www.nytimes.com/2008/02/23/business/23housing.html?pagewanted=1&_r=1
Published: February 23, 2008
WASHINGTON — Over the last two
decades, few industries have lobbied more ferociously or effectively than banks
to get the government out of its business and to obtain freer rein for
“financial innovation.”
But as losses from bad mortgages
and mortgage-backed securities climb past $200 billion, talk among banking
executives for an epic government rescue plan is suddenly coming into fashion.
A confidential proposal that Bank of America
circulated to members of Congress this month provides a stunning glimpse of how
quickly the industry has reversed its laissez-faire disdain for second-guessing
by the government — now that it is in trouble.
The proposal warns that up to
$739 billion in mortgages are at “moderate to high risk” of defaulting over the
next five years and that millions of families could lose their homes.
To prevent that, Bank of America
suggested creating a Federal Homeowner Preservation Corporation that would buy
up billions of dollars in troubled mortgages at a deep discount, forgive debt
above the current market value of the homes and use federal loan guarantees to
refinance the borrowers at lower rates.
“We believe that any
intervention by the federal government will be acceptable only if it is not
perceived as a bailout of the bond market,” the financial institution noted.
In practice, taxpayers would
almost certainly view such a move as a bailout. If lawmakers and the Bush
administration agreed to this step, it could be on a scale similar to the
government’s $200 billion bailout of the savings and loan industry in the
1990s. The arguments against a bailout are powerful. It would mostly benefit
banks and Wall Street firms that earned huge fees by packaging trillions of
dollars in risky mortgages, often without documenting the incomes of borrowers
and often turning a blind eye to clear fraud by borrowers or mortgage brokers.
A rescue would also create a
“moral hazard,” many experts contend, by encouraging banks and home buyers to
take outsize risks in the future, in the expectation of another government
bailout if things go wrong again.
If the government pays too much
for the mortgages or the market declines even more than it has already,
Washington — read, taxpayers — could be stuck with hundreds of billions of
dollars in defaulted loans.
But a growing number of policy
makers and community advocacy activists argue that a government rescue may
nonetheless be the most sensible way to avoid a broader disruption of the
entire economy.
The House Financial Services
Committee is working on various options, including a government buyout. The
Bush administration may be softening its hostility to a rescue as well. Top
officials at the Treasury Department are hoping to meet with industry
executives next week to discuss options, according to two executives.
“There are a lot of ideas out
there,” said Scott Stanzel, a spokesman for President Bush, when asked at a White
House press briefing on Friday about a possible buyout program. “There are many
different ways in which we can address this problem and we continue to look at
ways in which we can do that.”
Supporters contend that a
government rescue could be the fastest and cleanest way to force banks and
investors to book their losses from bad mortgages — a painful but essential
first step toward stabilizing the housing market.
The government would buy the
mortgages at their true current value, perhaps through an auction, at what
would probably be a big discount from the original loan amount. The mortgage
lenders, or the investors who bought mortgage-backed securities, would be free
of the bad loans but would still have to book their losses.
If the government took control
of the bad mortgages, supporters of a rescue contend, it could restructure the
loans on terms that borrowers could meet, keep most of them from losing their
homes and avoid an even more catastrophic plunge in housing prices.
“Every citizen has a dog in this
hunt,” said John Taylor, president of the National Community Reinvestment
Coalition, a community advocacy group that has developed its own mortgage
buyout plan. “The cost of spending our way out of a recession is something that
everybody would have to bear for a very long time.”
Mr. Taylor estimated the government might end up buying $80 billion to $100 billion in mortgages. But he said the government could recoup its money if it was able to buy the mortgages at a proper discount, repackage them and sell them on the open market.
Surprisingly, the normally
free-market Bush administration has expressed interest. Treasury officials
confirmed that several senior officials invited Mr. Taylor to present his ideas
to them on Feb. 15. Mr. Taylor said he had also received calls from officials
at the Office of Thrift Supervision and the Office of the Comptroller of the
Currency, which is part of the Treasury Department.
But even supporters acknowledge
that a government rescue poses risks to taxpayers, who could be left holding a
very expensive bag.
Ellen Seidman, a former director
of the Office of Thrift Supervision and now a senior fellow at the
moderate-to-liberal New America Foundation, said the government’s first
challenge is to buy mortgages at their true current value. If the government
overpaid or became caught by an even further decline in the market value of its
mortgages, taxpayers would indeed be bailing out both the industry and
imprudent home buyers.
“It’s not easy, but it’s not
impossible,” Ms. Seidman said. “There are various auction mechanisms, both
inside and outside government.”
A second challenge would be to
start a program quickly enough to prevent the housing and credit markets from
spiraling further downward. Industry executives and policy analysts said it
would take too long to create an entirely new agency, as Bank of America
suggested. But they expressed hope that the government could begin a program
from inside an existing agency.
But even if the government did
buy up millions of mortgages and force mortgage holders to take losses, the
biggest problem could still lie ahead: deciding which struggling homeowners
should receive breaks on their mortgages.
Administration officials have
long insisted that they do not want to rescue speculators who took out
no-money-down loans to buy and flip condominiums in Miami or Phoenix. And even
Democrats like Representative Barney Frank of Massachusetts, chairman of the
House Financial Services Committee, have said the government should not help
those who borrowed more than they could ever hope to repay.
But identifying innocent victims
has already proved complicated. The Bush administration’s Hope Now program
offers to freeze interest rates for certain borrowers whose subprime mortgages
were about to jump to much higher rates. But the eligibility rules are so
narrow that some analysts estimate only 3 percent of subprime borrowers will
benefit.
Bank executives, meanwhile, warn
that the mortgage mess is much broader than people with subprime loans.
Problems are mounting almost as rapidly in so-called Alt-A mortgages, made to
people with good credit scores who did not document their incomes and borrowed
far more than normal underwriting standards would allow.
Borrowers who overstated their
incomes are not likely to get much sympathy. But industry executives and
consumer advocates warn that foreclosed homes push down prices in surrounding
neighborhoods, and a wave of foreclosures could lead to another, deeper plunge
in home prices.
Right or wrong, the arguments
for rescuing homeowners are likely to be blurred with arguments for rescuing
home prices. At that point, industry executives are likely to argue that what
is good for Bank of America is good for the rest of America.