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Mortgage Relief for All; But Who?s Paying??

By Jean Braucher

Glenn Hubbard is the dean of the Columbia Business School as well as the former chairman of the Council of Economic Advisors under President George W. Bush. That resume is what makes so puzzling his op ed (with a Columbia colleague, Chris Mayer) in yesterday?s Sunday NY Times: Op-Ed Contributors:  How Underwater Mortgages Can Float the Economy. Maybe I shouldn?t be surprised that their proposal seems unhinged from reality.

Who wouldn?t love to solve the mortgage crisis? But Hubbard and Mayer?s "plan" seems to be missing a few key links. They envision mortgage refinancings being made available to millions of underwater borrowers at prevailing rates (4.3 % is mentioned), seemingly regardless of their credit scores, an issue not raised in the piece. Hubbard and Mayer further contemplate Fannie Mae and Freddie Mac getting involved in arranging mortgage-backed securities to raise capital to deliver refinancings to the masses currently denied them. They add: Not only would foreclosures be avoided, but stimulus of massive proportions would be achieved as mortgage payments are brought down by lower interest rates!

But who is going to buy shares in securitized, refinanced mortgage loans in which collateral value does not equal the amount of the debt and the interest rates are low? Underwater loans are higher risk. For example, if the borrower loses her job, she can't sell her home and pay off the loan because she owes more than the home is worth. And let?s not mention that if somehow the government is going to subsidize these refinancings and pay off investors in the original loans, even underwater ones, at 100 cents on the dollar, it would be a huge bailout to those who invested to create the bubble.If that happens, I am predicting 100 percent membership in the Tea Party Movement.  Into the harbor with the booty, mateys!

What am I missing here?

Even assuming some answers to these rather gapping problems with the Hubbard-Mayer concept, their vehicle for all this to happen is: Can you guess? Servicers! Hubbard and Mayer envision that servicers will get unspecified incentive payments to initiate these refinancings, with the incentives folded into the refinanced mortgages. No problem there, right? Servicers will be eager to participate (and only charge reasonable rates).That?s why the HAMP program has been such a raging success, because servicers are so interested in doing all they can to stem investor losses and allow borrowers to avoid foreclosure, regardless of servicers' own self-interest.

Now a word from our official wet blanket. Let?s listen to Treasury Secretary Timothy Geithner:  ?I think it is very important to say that servicers have done a terrible job . . . .?  See minute 77 of the following:  http://cop.senate.gov/hearings/library/hearing-062210-geithner.cfm (hearing before the Congressional Oversight Panel on June 22, 2010, concerning lack of performance in the administration?s mortgage modification program, which involves subsidized lower interest rates and no required write-down of underwater loans). See also (self-promotion alert) my forthcoming piece about the disappointing first year of the Home Affordable Modification Program (HAMP), significantly due to servicer resistance.  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1518098  Do not expect that a new government-sponsored  mortgage relief program, to be implemented by mortgage servicers, can lumber into operation quickly (or ever).

The mortgage crisis continues. It appears likely to take years to resolve itself, and at this point, market self-correction?no matter how long it takes?seems to be the only plan the administration is willing to consider.But investors are going to have to take more losses for this mess to be cleaned up sooner rather than later. Absent bankruptcy modification at a bare minimum, it is going to be a tortuously slow process, continuing to put a drag on economic recovery.

That a leading figure from the Bush administration's economic team seems to think capital markets will step up to buy underwater loans at low interest rates can only depress us all about prospects for an early end to our current troubles. Yes, it would be grand to provide a stimulus for the economy and solve the mortgage crisis, all in one fell swoop, but who's paying?

Full post as published by Credit Slips on September 20, 2010 (boomark / email).