Last week I posted on a colleague's plan to clean up the financial toxic waste dragging down our economy. The basic idea is for the government to buy the failed mortgages buried inside that toxic waste -- meaning that the owner of a toxic waste bundle would get that cash and not incur any loss from a failed mortgage for the next three years. The FDIC would buy the mortgages at face value less a $5,000 processing fee. In his plan, the FDIC would use its successful techniques to restructure those mortgages to keep people in their homes.
Why is this a good idea? My colleague's plan would unfreeze the market for the toxic waste, which might then be valued at 90% of its face value. And once an active market for trading the toxic waste emerged, we would no longer need to rely on mark-to-market accounting to estimate its worth. Suddenly, the toxic waste would become worth something that private investors would be willing to buy.
My colleague -- who worked with me on several consulting projects 25 years ago -- has an exceptional background. He's semi-retired and does not have a blog of his own. He retired from a military career, has five degrees including a Doctorate in Business Administration (DBA) from Harvard Business School (HBS) and completed consulting assignments with 74 companies worldwide. Not surprisingly, his plan has gotten some reactions and here are his thoughts on some of those comments:
Here are a few of the comments (in bold) and my colleagues' thoughts on them:
- Let the banks work out the bad mortgages with the house dweller and keep taxpayer money out of it. My colleague points out that the banks do not own the mortgages that his plan covers. Those mortgages are part of bundles of securities that are owned by institutional investors around the world. If the banks got involved, they would be acting on behalf of the MBS holders, which is not their job. Under my colleague's plan, the FDIC's costs would be covered by the processing fee -- for example, at a rate of 1 million failed mortgages a year, the $5,000 fee would generate $5 billion a year for the FDIC to use in disposing of the mortgage. And once the FDIC took control -- based on its ownership of the mortgages -- it could apply its successful techniques for keeping people in their homes based on its decades of experience.
- Once the guarantee is in place, banks will cheat -- trying to get all their mortgages covered by the guarantee. My colleague thinks there are two ways to mitigate against this moral hazard. First, the mortgage holders will resist a quick foreclosure because it is bad for their credit ratings and is a huge disruption to their lives. Second, the FDIC could set up specific rules that banks would have to follow before they could put a mortgage in foreclosure. These rules would, if enforced, prevent abuse.
Keep your comments coming. And if you feel so moved, please forward this post to your elected representatives.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.
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Reader Comments (Page 1 of 1)
2-04-2009 @ 1:45PM
Thomas Paine said...
I suggested something similar in a comment to one of your posts, last year. First, an understanding needs to take place: those toxic waste MBS are not 100% defunct. As many folks have previously pointed out, the underlying properties do retain some value.
Whatever the dollar-amount difference is between mortgaged value and current market value, is all that needs to be Guaranteed. Then, in an ideal investor-mentality fashion, the MBS instruments are made whole.
This applies whether the property is currently occupied and the owner is headed into default, or whether it is vacant and waiting upon a foreclosure auction to take place. There is *some* value there, and don't overlook PMI payouts, although those companies are dropping like flies.
To ascertain all of the affected properties' value would require a considerable workforce of real estate appraisers and corollary workers. Good. New jobs. Who picks up the tab for their wages? It's shared between the loan originators and the New Gov't Agency that would handle this operation.
WAIT! Don't start screaming about a new gov't agency, just yet. That agency would be made up of individuals and departments from within existing agencies. My earlier post laid out more details about this aspect, but briefly:
take from the FHA, the HUD, the VA, the SBA, the FEMA and -yes- from the FDIC. All of these agencies have vast experience at getting people into homes, helping people to keep their homes and/or how to help people manage their finances.
The current Administration would need to throw all of its weight, and intellect, behind this plan. As in... Pretend that all of America ran out of water, everything that can burn, is burning and we need to dig a bunch of Wells, PDQ.
If our tax dollars are to guarantee *anything*, it should simply be a difference between Current and Previous value amounts, not for the whole dammed enchilada. Is that CFB? (ask your military friend, he knows).
Additionally, such an undertaking should convey the level of magnitude, and degree, that our gov't is taking in addressing the economic crisis. That should instill some confidence, not only into the financial markets, but into the American public, as well.
It is that public which can jumpstart the cycle into an upward phase. As it is, the cycle is a closed-loop affair with participants that (basically) cannot be swayed by any of the mostly token 'stimulants' so far introduced. We need something BIG. We need an Apollo project, squared, for our economy.
2-20-2009 @ 12:17PM
Jeff said...
Here is my simple plan... have all mortgage backruptsies halted, declare everyone current on their loans with the next payment due on the next loan due date, and have all current and future mortgage loans set to 5% or lower period.