The Post reports on a plan from the Office of Thrift Supervision [OTS] (one of the regulatory agencies that didn't see the housing bubble) which would have the government buy up millions of underwater mortgages. [Correction: The government would not actually buy the mortgages. Under this plan, the Federal Housing Authority would guarantee the mortgages at the value at which they are purchased by other financial institutions. The potential financial cost to the government is the same, although including private intermediaries undoubtedly adds substantial transactions costs to the scenario in which the government buys the mortgages directly.] The deal is that the government would pay the banks for their underwater mortgages, based on the current market value of the home, and then issue them a certificate for the difference between the current market value and the outstanding amount on the mortgage. When the home is sold, if the price is high enough, the government gets back what it paid for the mortgage, the bank will recover the value of the certificate, and homeowner will pocket any additional money. Then the Post tells us that "If there's not enough profit to pay off the certificate, the original lender would take a loss." That is only part of the story. What if there is not enough money to pay off the mortgage held by the government? Guess what? In that case the taxpayers swallow the loss. Guess what? The Post never discussed this possibility. In a collapsing housing bubble, like the one we are presently seeing, it is very likely that the price of houses sold in two or three years will be considerably lower than prices today. That means that the government could be eating tens of billions of dollars of losses under the OTS plan. It is incredible that the Post never even discussed this possibility. Can the Post still have reporters who don't know about the housing bubble? Does the Post have reporters who only talk to economists and analysts who still don't know about the housing bubble?
--Dean Baker
