Next rescue step - moratorium on home mortgage foreclosures?

Posted Sep 29th 2008 11:30AM by Joseph Lazzaro
Filed under: Economic Data, Politics, Housing, Recession, Financial Crisis

Few economists / analysts would deny that the financial crisis is so complex, with numerous casual factors, that there's more than enough blame to go around: no one party can or should be seen as 'the culprit.' Moreover, what's paramount now is to identify what works, i.e. what helps solve the crisis, and implement it.

The U.S. Congress' bailout / rescue bill (pdf) is one tool: it will help. If it goes reasonably according to plan, the U.S. Treasury, and the companion agencies the rescue creates, will slowly remove distressed / bad assets from the financial system and in the process would both stabilize the credit markets, and equally important, restore confidence in the financial system.

Another tool: mortgage help in the form of refinanced mortgages for homeowners having trouble paying their mortgage / nearing default.

Economist David H. Wang said Congressional Democrats were unsuccessful in their effort to get U.S. bankruptcy laws amended so that judges could adjust the terms of mortgages -- Congressional Republicans were adamantly opposed to it -- but the bailout / rescue package does authorize the U.S. Government to further assist homeowners who face mortgage defaults.

After placing a temporary moratorium on foreclosures, the U.S. Treasury "should delegate to the Federal Housing Administration, with Congressional consent, more authority to offer lower-interest-rate, 30-year fixed rate mortgages for at-risk homeowners," Wang said. "The U.S. Government does not have enough short-term resources to refinance all at-risk mortgages, but the more that are refinanced and avoid foreclosures, the better."

The plan would have three benefits -- all macro net-positive for the U.S., Wang said. It would: 1) keep more homeowners in their homes, boosting local GDPs with spin-off effects; 2) improve banks' balance sheets, reducing pressure on banks; 3) stem the rise in distressed / bad mortgage back securities and their cousins -- decreasing credit market pressure, as well as quelling institutional investors' sentiment to dump these assets.

Housing / Economic Analysis: While the avoidance of a deep recession is the best way to help at-risk homeowners (and the implied in that is a functioning financial system), adding more funds so that the FHA can refinance more mortgages would be yet another effective tool to defeat the default / bad debt 'shark' that's plaguing our financial waters. Economist Wang also suggested starting with owner-occupied, low/moderate income homeowners first, then broaden the plan if/when funds become available.

Tags: bailout bill, bond market, credit markets, Democrats, Federal Housing Administration, FHA, foreclosures, gdp, housing, interest rates, inthenews, median home prices, mortgage backed securities, mortgages, Republicans, rescue bill, U.S. Congress, U.S. economy, U.S. Treasury

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Reader Comments (Page 1 of 1)

9-29-2008 @ 12:07PM

David Huston said...

If Congress is actually going to take steps like freezing foreclosures (which it won't, but which it has no Constitutional authority to do in any case), it may as well take the step actually required here, - to declare all credit default swaps retroactively unenforceable. The CDS's are the real problem, and the only solution is to void them (they were all constructed in secret, without regulatory oversight of any kind, and apparently threaten the world economy.)