I'm pretty much just going to post this as Bill Callahan and Frank Ford wrote it. Just a few extra thoughts before I do. The key point to me is that no matter how angry it makes me or all of us, clearly we need to do this. But what we need to do in a quick, band-aid fashion, is a bailout. What should take longer, in my opinion, is the actual restructuring that may occur.
We need to make sure that all the necessary checks and balances are in place, that any regulatory changes put into place make sense for the long term. And as Bill and Frank are pointing out, that they make sense for those of us in our communities. I'm posting this on Active Rain instead of my outside blog because the points they raise are thoughtful, deserve discussion, and might spark some ideas for your own community needs regarding this bail out. Here is what they wrote:
To: Interested parties in Greater Cleveland RE: What we learned last night about the proposed Federal Bailout September 19, 2008 Proposed "Resolution Trust Corporation" - a Community Protection Agenda
While the details are murky, Paulsen, Bernanke and Congressional leaders are publicly committed to create,within a few weeks, a new Federal entity described as analogous to the Resolution Trust Corporation.
Yesterday's Bloomberg report says:
"The two regulators, in talks with lawmakers late today, sought support for a plan to help financial institutions remove from their balance sheets illiquid mortgage related assets at the root of the yearlongcredit crisis.
Congressional leaders said they intend to work to pass such legislation within days."
Presumed insiders Brady, Ludwig and Volcker, in their oped piece about this proposal in the WSJ Wednesday, described the proposed entity's functions:
"Such a stabilizing mechanism would accomplish four much needed tasks:
"First,by buying paper that otherwise is effectively not trading, it would help restore liquidity to the marketplace and help markets to function more fluidly again.
"Second, by warehousing the troubled paper for a longer period than, for instance, the Fed's discount window typically should or could, it would allow for a more orderly liquidation of this paper, and the chance for much of it to recover a portion of its value.
"Third, by giving the agency the ability to manage mortgages with flexibility to keep people in their homes and businesses running, it should lessen the number of foreclosures. This, in turn, would help moderate the decline in real estate values and the deterioration of neighborhoods, thus supporting house prices that in fact lie at the heart of the crisis.
"Fourth, where necessary, like the RTC of the 1980s, this new mechanism can assist the Federal Deposit Insurance Corporation in resolving sick institutions that are so clogged with the troubled paper they cannot continue as independent entities. However, we would hope that purchasing the mortgage related paper will minimize the need to provide emergency, short term assistance to solvent banking institutions."
The third function " managing mortgages" to "lessen foreclosures" is very attractive, of course, and
presumably will be a major political talking point of proponents. It's possible that this initiative represents a breakthrough for our efforts to tame the foreclosure beast in Cuyahoga County.
But how would this work, exactly?
We're aware of three basic categories of "illiquid mortgage related assets" that this "RTC" might take agree to acquire. The first is actual mortgages held by the institutions in their own portfolios. The second category probably much bigger and more problematic is mortgage based securities. The third is contracts and derivatives related to mortgage based securities.
It's easy to see how the "RTC" could take over the management, workout and disposition of actual unsecuritized mortgages, just as the original RTC did. But unsecuritized home mortgages are not a very large factor in the foreclosure crisis.
Much harder to see is how the "RTC" will reduce foreclosures by taking over and managing the institutions' junk mortgage based securities and derivatives. The owner of an MBS doesn't "own" any of the underlying mortgages only an equity share in a pooling entity (e.g. a trust) for which "control" is divided among various contract players, i.e. the trustee, the master servicer, etc.
So how will just taking over an institution's portfolio of nonperforming mortgage based securities which seem to be the main "illiquid mortgage related assets" at issue, and are certainly at the heart of the national foreclosure tsunami enable the "RTC" to do what Volcker et al. say it's supposed to do?
Answer: It probably won't, unless the law is written to make sure it does.
To the extent that we have any contacts who may be in a position to influence the final shape of this proposal, we should try to get the following principles written into it:
1. In managing any mortgage related assets it may acquire, the "RTC"'s guiding mission includes:
a)avoidance of foreclosure of owner occupied homes;
b) equitable renegotiation of mortgages as needed to preserve both home ownership and equity for all parties;
c) enabling current residents, including tenants of rental housng, to stay in their homes through and after foreclosure;
d) the management and disposal of properties after foreclosure in a manner consistent with community preservation.
2. The "RTC" will not take over any mortgage related asset unless the terms of acquisition give it full
management and control of the underlying mortgage(s).
After drafting the preceding points, we had the opportunity to discuss them with members of the Cuyahoga County Vacant and Abandoned Property Action Council - including representatives of the County, the City of Cleveland (administration and City Council), the First Suburbs Consortium, Cleveland Municipal Housing Court, the Cleveland Neighborhood Development Coalition, and the Enterprise Foundation, as well as Neighborhood Progress.
The Council's members expressed broad agreement with the concerns raised above and their willingness to participate in an effort to address them with legislators.
Members of the Council raised another important concern: Foreclosed properties now controlled by Federal entities (HUD, VA) are exempt from municipal enforcement of building and housing codes. This is creating major problems for cities, especially in connection with HUD properties. Acquisition of thousands of foreclosed properties by a Federal "RTC" could make these problems much worse unless the legislation provides that:
3. The "RTC" will promptly establish and record clear title to any real estate asset it may acquire through
foreclosure or otherwise, and as owner will be subject to all applicable state and local laws and
Bill Callahan is the convener of Cleveland's Foreclosure Action Coalition, and blogs about foreclosures and
other local concerns at http://www.callahansclevelanddiary.com. (Bill is being modest here, he is clearly one of our area foreclosure experts.) Frank Ford is Senior Vice President for Research and Development of Neighborhood Progress, Inc. Reprinted with permission from Bill Callahan Peace Out - 3C
UPDATE: Adding this Times article about the Bush request/Fed proposal with more flesh on it now that it's Saturday.
Also adding this link on the bail out from The Economist I always appreciate clear explanations. This sums up what has transpired very well.