A Better Foreclosure Fix?

Good old American free-enterprise vultures may be trumping Obama's Treasury theorists in slowing down the rate of mortgage defaults.

Instead of complex schemes to lower interest payments for under-water home owners, speculators are buying up loans at distress prices and cutting the principal but still keeping it high enough to profit--a market-based solution if there ever was one.

The media have been quicker to endorse this approach than the government. A New York Times editorial notes that, rather than reducing interest, "A better way to lower the monthly payments for these people is to reduce the principal remaining on the loan. That way, the payments become affordable and, as equity is rebuilt, the borrower has both an incentive and the means to keep current. The Obama plan provides subsidies for lenders to reduce principal balances, but the option is not promoted as prominently as simply reducing the interest rate. That’s a shame. It is a better way to go..."

The day before, an OpEd piece had argued: "For subprime and other non-prime loans, which account for more than half of all foreclosures, the best thing to do for the homeowners and for the bondholders is to write down principal far enough so that each homeowner will have equity in his house and thus an incentive to pay and not default again down the line. This is also best for taxpayers, who now effectively guarantee the securities linked to these mortgages...

"For these non-prime mortgages, there is room to make generous principal reductions, without hurting bondholders and without spending a dime of taxpayer money, because the bond markets expect so little out of foreclosures."

Bloomberg reports a December study by the Comptroller of the Currency showing that, after six months, more than 55 percent of the loans modified last year re-defaulted while only 28 percent of homeowners whose modifications trimmed their principal by a fifth or more were late after six months.

Banks and other mortgage holders are resisting such immediate markdowns in the value of loans in the hope of more taxpayer bailouts and/or a rebound in the real-estate market.

Then, too, there is a natural revulsion that some of the new vultures are the same people who started this mess, such as the former Countrywide executives who wrote sub-prime mortgages and are now in business buying them back at 38 cents on the dollar. “It’s like Jeffrey Dahmer selling body parts to a clinic," Gail Collins notes.

But it seems to make economic sense--and, in the larger picture, even social justice--for the makers of bad loans to eat their losses now and stabilize the housing market sooner rather than later.

Maliki, Can You Spare a Dime?

As Washington prepares to tap taxpayers for a bipartisan bailout of the US financial system, is it out of order to ask our Iraqi friends who are sitting on $80 billion of oil profits to put a little something into their own pot?

After our expenditure of half a trillion dollars, $10 billion a month of American money is still going there. Our friends in Baghdad could ease the credit crunch here by taking over some of that tab from now on without going broke themselves.

The suggestion might be most palatable coming from their best friend, John McCain, who is presenting himself as responsible for their victory over chaos. Would we be leaving Iraq with less honor if they starting buying some of the blessings of democracy with their own money?

One incentive for such a selfless gesture might be the prospect of Barack Obama moving into the White House next January with his plans for troop withdrawals that would speed the day when the Iraqis run their own country and pay for its upkeep.

The old song of the 20th century Depression had a war veteran asking, "Buddy, can you spare a dime?" Nouri, old buddy, can't you spare a billion or two or three?

Home Wrecking: Victims and Walkaways

The housing crisis started out looking like a death in the family but is now resembling divorce as well. Added to the record numbers of Americans losing their homes because they can't make the mortgage payments are others who can afford to but decide to cut their losses and default voluntarily.

The category of walkaways is made up of speculators as well as new homeowners who were lured by introductory rates into buying bigger homes than they can afford.

"Some financial advisers," the Wall Street Journal reports, "are even encouraging homeowners who are upside down to consider foreclosure, which they see as a purely financial decision with limited negative consequences...(A) web site started in January that offers foreclosure counseling to homeowners advises that borrowers who default on one mortgage can typically get another mortgage between two and four years after a foreclosure. Then, 'before you know it, you will have this behind you and a fresh start!'"

As the politicians ponder ways to ease the crisis with rate freezes and subsidies, the emphasis is on the more than 900,000 households now in involuntary foreclosure, up 71% from a year ago, according to a survey by the Mortgage Bankers Association.

But as home prices continue in free fall, it will be necessary to separate the victims of predatory loan practices from those who saw a free lunch and are now walking out without paying the tab.

Fannie Mae, the government sponsor of loan guarantees, is working on harsher penalties for walking away, pursuing some borrowers in court and lengthening the time between when borrowers default and when they become eligible again for a Fannie Mae-backed loan.

"Of course, we will make exceptions for extenuating circumstances, like divorce or death," says a Fannie Mae executive. "But who we are trying to get are the people who can afford to make payments but have decided not to."