Henry Paulson spoke today about the mortgage crisis and how the government was going to encourage a rescue. I suppose the cynic in me can ask what makes anyone believe that it’s going to be done right this time. The origins of the subprime meltdown are based in a remarkable combination of greed and ignorance, and I’m sure some fraud thrown in. Paulson’s plan, while well intended, may come with its own unintended consequences.
To start, I must say I appreciated his logic in categorizing the four types of subprime mortgage holders:
- Those who can afford their adjusted interest rate [and] need no assistance.
- Homeowners who haven’t been making payments at the starter rate on their subprime loan and may not have the financial wherewithal to sustain home ownership.
- Homeowners [who] might choose to refinance their mortgage – putting them in a sustainable mortgage while keeping investors whole.
- Those with steady incomes and relatively clean payment histories who could afford the lower introductory mortgage rate but cannot afford the higher adjusted rate.
Well, (1) and (2) are not the issue. The first group seems to have gotten through just fine, and the second are clearly in the group that never should have been given a mortgage. The third and forth groups he proposes to help with a combination of state sponsored tax-exempt bonds and streamlined refinancing. The risk is this; every change in taxation has an effect. Raise the tax on a good or service and you reduce the demand for it, and perhaps raise the demand for an alternate should one exist. The tax exempt bonds, whatever their total market value, will compete for money in the bond market, raising the cost of capital elsewhere. The category (3) refinancing will make the original mortgage holders whole, when perhaps their CMO tranche didn’t deserve to be valued at 100%, perhaps it’s changed hands so many times that the current owner paid pennies on the dollar. For that investor to now collect face value does not pass the common sense test. In the end, Paulson’s plan may very well work, and we may survive this crisis without greater damage to the economy, but even so, I’ll leave with the question, “What have we learned and how do we keep history from repeating, yet again?”
JOE
Bucket #3 is further limited to those with less and 3% equity. If your share my opinion that home values have further to fall, then you may also agree with the folly of any homeowner choosing to be “rescued” into debt slavery.
And Joe, I wholeheartedly agree with you about lessons learned: Nowhere does Paulson propose to punish those that foisted this crime upon us.
Punishment may come though: the perpetrators started believing their own lies and kept the junk for themselves in various SIVs. And they have just as much Commercial MBS as they do Residential, so the story is not nearly over…