Awhile back, I wrote a post warning about the impact that junk debt buyers could have on the housing crisis. The business model is as simple as it is brutal: buy delinquent loans for as little as 20 cents on the dollar, foreclose on the homeowners, sell the properties at 50 cents on the dollar, and double your money after costs. Never mind that the activity wrecks home values and destabilizes communities - this is business, after all.
Don't you love how it's "business" when common people get screwed, but it magically becomes "a confidence crisis" once the fat cats start losing money?
In a move that has the potential of making a bad situation worse for millions of Americans, the Bush Administration is trying to scare the Congress into approving a $700 BILLION blank check for Treasury Secretary Paulson to make US taxpayers the biggest junk debt buyers in history.
Members of Congress are wary, and many are calling for additional help for regular people, like tougher mortgage workout requirements for lenders and additional jobless benefits for the increasing number of people unable to find work.
The questions that the Administration must be required to answer before any plan is approved are these:
How will the government behave as a note holder? Will Uncle Sam be required to provide workouts for the homeowners suffering under the junk loans that Wall Street seeks to dump?
As hard as it is dealing with a lender's Loss Mitigation Department, that experience will likely pale in comparison to dealing with the government, unless the Congress puts in place clear ground rules that favor turning these junk loans into affordable, stable loans.
I would think that, if the Congress has the courage to require this as part of any bailout, the value of junk loan portfolios could actually be enhanced by converting them to stable, low risk loans. Over the long run, taxpayers would see three net positives: investment banks would stop dying off in droves, the retail lending market would start working again, and most importantly, the foreclosure crisis could be put in check.
Sadly, political reality is such that these protective measures probably won't end up in the final version of the law, even though they would be in the best interests of the taxpayers being asked to foot the bill.
I'm not holding my breath, but I will hope for a miracle.
;)
;)
CNN reported earlier today that the entire bailout plan fits on three sheets of paper. WOW! I cannot imagine it's well thought-through at all if it's so short. And probably no one in Treasury or Congress has even remotely thought of the level of bureaurocrasy needed to make this work. No one has even mentioned things like guidelines for restructuring the bad loans (to let distressed homeowners stay on), what sort of commitment the government will have to being either a REO department or else a landlord, and, of course, how they'll deal with loss mitigation--probably because few people involved have even thought these things through at all.
As someone waiting on final approval on a short sale purchase (we were nearly there last week--just waiting on final numbers on the net sheet to be approved by the bank and mortgage insurer after initial nods--now it's back up in the air), I am afraid some banks are going to freeze up and wait to see what Uncle Sam brings to the table, hurting both buyers and of course the distressed homeowners trying to get on with their lives.