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US real-estate bubble is fed with the same malfeasance as the ’90s stock-market bubble
IN April,
Henry Paulson, the Treasury Secretary, declared that all the signs he saw indicated that the housing market was “at or near the bottom.” He insisted that problems caused by the meltdown in the market for subprime mortgages were “largely contained.” But the time for denial is past as both housing starts & applications for building permits have fallen to their lowest levels in a decade, showing that home construction is still in free fall. And if historical relationships are any guide, then the housing slump will probably be with us for years, not months. It’s becoming clear that the mortgage problem is anything but contained. It’s not just confined to subprime mortgages, which are loans to people who don’t satisfy the standard financial criteria. There are also growing problems in socalled Alt-A mortgages, which are another 20% of the mortgage market. Problems are starting to appear in prime loans too.Many on Wall Street are clamouring for a bailout – for someone to step in & buy mortgage-backed securities from troubled hedge funds. But that would be like saving bad actors from the consequences of their misdeeds. For it is becoming increasingly clear that the real-estate bubble of recent years, like the stock bubble of the late ’90s, both caused and was fed by widespread misconduct. Rating agencies like Moody’s Investors Service, seem to have played a similar role to that played by complacent accountants in the corporate scandals of a few years ago. In the ’90s, accountants certified dubious earning statements; in this decade, rating agencies declared dubious mortgage-backed securities to be highest quality, AAA assets. Yet our desire to avoid letting bad actors off the hook shouldn’t prevent us from doing the right thing for borrowers who were victims of the bubble.
Most
of the proposals 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.Consider a borrower who can’t meet the mortgage payments and is facing foreclosure. In the past, the bank would oft en have been willing to offer a workout, modifying the loan’s terms to make it affordable, because what the borrower was able to pay would be worth more to the bank than its incurring the costs of foreclosure and trying to resell the home. Today, however, the mortgage broker who made the loan is usually the first link in a financial merry-go-round. The mortgage was bundled with others and sold to investment banks, which in turn sliced and diced the claims to produce artificial assets that Moody’s or Standard & Poor’s were willing to classify as AAA. And the result – there’s nobody to deal with.
Looks like a clear case of government intervention. There’s a serious market failure, and fixing that could greatly help hundreds of thousands of Americans. The federal government shouldn’t be providing bailouts, rather help to arrange workouts. This would need a lot of work, from lawyers as well as financial experts. 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. The point, is that doing nothing isn’t the only alternative to letting the parties who got us into this mess off the hook. Say no to bailouts – but let’s help borrowers work things out.
For Complete IIPM Article, Click on IIPM Article Source : IIPM Editorial, 2007
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