How Not To Fix The Subprime Mortgage Crisis
In today’s New York York Times, Shelia Blair, Chairman of the Federal Deposit Insurance Corporation, makes this proposal on how to fix the subprime mortgage crisis:
[S]ubprime servicers should take a more standardized approach: restructure all 2/28 and 3/27 subprime hybrid loans for owner-occupied homes in cases where the borrower has been making timely payments but can’t afford the reset payments. Convert these to fixed-rate loans at the starter rate.
In other words, Blair is calling for a wholesale rewriting of the terms of every sub-prime mortgage in the country, without regard to the credit worthiness of the homeowners involved. And, incredibly, she claims it isn’t a bailout:
This would be no bailout. These borrowers would still be required to make their monthly payments — at rates higher than what prime is today. Billions in savings would be generated by avoiding the administrative, legal, marketing and other costs of foreclosure, which can run to half or more of the loan amount. And avoiding foreclosure would protect neighboring properties and hasten the recovery of markets burdened by an excess supply of houses.
Yes, it would be a bailout. The people benefited by it would end up with lower mortgage payments than they would otherwise have had, and, in many cases, mortgage payments lower than what they otherwise would have had under the terms of their existing loans and, in most cases, lower than would be justified given their credit ratings. Moreover, Blair is suggesting that the mortgage industry should take a gamble on these loans even though the entire subprime meltdown is testimony to the fact that the people who qualified for them were, for the most part, not good credit risks. Yes, it would save money in the short term, but in the long term, it would simply delay the inevitable for most people.
Rather than delaying the inevitable, the government needs to let this “crisis” play itself out. Yes, it will be painful. People will lose their homes and the housing market will remain depressed for another year, if not longer. But, quite honestly, this is the price to be paid for nearly a decade of an irrationally-rising real estate market and people who bought houses that, notwithstanding the great no-interest loan they could qualify for, they really could not afford.