Sheila Blair Bair, head of the FDIC, makes a good point in an interview this morning:
"Why there's been such a political focus on making sure we're not unduly helping borrowers but then we're providing all this massive assistance at the institutional level, I don't understand it," she said. "It's been a frustration for me. ... I support all the measures; I've been a part of all the measures that have been taken,. But we're attacking it at the institution level as opposed to the borrower level, and it's the borrowers defaulting. That is what's causing the distress at the institution level. So why not tackle the borrower problem?"
Exactly. This is why I was initially so enthusiastic about John McCain's plan to address foreclosures before it became apparent that he wanted to go about it in the most expensive and least efficient way possible. The problem still remains, however, that stabilizing the housing markets will go a long way towards dealing with the toxic securities that are making financial institutions so nervous. Now that the Treasury Department has made clear that it plans to inject capital into banks rather than buying these securities -- and recapitalization is the right idea -- it is less likely that the funding and authorities provided by the rescue plan will be used to address foreclosures at the homeowner level.
Meanwhile, the Wall Street Journal article that includes Blair's interview reports that the voluntary measures to help lenders and homeowners renegotiate mortgages included in the summer's Dodd-Frank Housing bill are not yet stemming the wave of foreclosures, since they rely on lenders taking a big loss voluntarily. For obvious reasons, they're not interested in doing that, especially if government assistance may be forthcoming. In the meantime, the continuing wave of foreclosures hurts the financial markets, consumer confidence, and the property values of surrounding homes -- and abandoned houses do no one any good.
What's the best approach to the foreclosure problem? It's unclear at this point that there is an inexpensive or easy solution, short of coercive measures that force lenders to take a loss by writing down mortgages and renegotiating them, which may be a difficult sell politically (if we pay the original value of the mortgage, as McCain suggests, it's essentially an expensive bribe to make lenders issue a new loan). The federal government has various agencies and authorities with the mechanisms to tackle the issue -- organizations that can guarantee or issue new home loans, or renegotiate old ones to more reasonable values and rates -- but they need cooperation from the lenders themselves in order to pull homeowners out of their foreclosing mortgages.
-- Tim Fernholz
