- Would the Pearlstein anti-Foreclosure Plan Work?
Washington Post business columnist Steven Pearlstein has offered a plan he believes would forestall the million plus foreclosures many are predicting to befall American homeowners in the coming year. Would the whole plan work? You can see the description in his WAPO column here: It’s sure to be only one of many plans floated in the next few weeks as government officials attempt to placate homeowners (voters) and minimize the economic impact of the credit market implosion. Pearlstein’s proposal brings the considerable influence of Fannie Mae and Freddie Mac to bear on the problem, something that may have to occur before investors consider returning to the market for mortgage debt secured products. It’s sad, because many homeowners have little chance of defaulting on their mortgages. If lending standards were sensibly (not with the strong knee-jerk reactions we’ve seen in recent weeks) revised to exclude the highest risk loans, and some of the very creative mortgage products were eliminated, the problems would fix itself fairly quickly.
All but the highest risk borrowers need to be able to refinance their balloon payments or high interest ARMs into a normal fixed interest and fixed term product. This would stabilize payments and allow homeowners to continue fitting their mortgage payments into the monthly budget, and spend for other consumer products at the same time. Other business owners would appreciate this continued ability for homeowners to contribute to the economy. The Pearlstein proposal addresses this and tries to minimize the distaste associated with a complete government bailout (funded by taxpayers, of course, as government bailouts are by necessity), as some others have proposed.
Even if his plan may be, in a way, distasteful, a collapse of the real estate market precipitated by an additional hundreds of thousands of foreclosed homes hitting the market, and the price erosion that would create, would probably be more distasteful. A cornerstone of his plan if for liens to be created that represent 90% of the difference between what the homeowner owes on the property and its’ market value (who determines this, exactly?). The lien would allow refinancing, whereas without it that would have been impossible due to negative equity in the property.
He ‘s proposing refinancing into a 40 year mortgage, coupled with the aforementioned lien, in lieu of foreclosure. The longer term mortgage would help lenders offset losing some of the value they would otherwise experience, because they could collect greater total interest. 40 year mortgages are not the hot ticket for homeowners in most cases, but an exception would be made here. The liens and mortgages would be kept by investors, or (more likely) sold and repackaged packaged into securities by Fannie Mae and Freddie Mac. These would then be released for consumption by investors.
Would it work? Possibly. It certainly seems better than some of the alternatives, especially considering the cost of failure. The market needs a correction, and this may provide it, without the total collapse many predict is in progress without it. It’s also possible that the credit industry downturn isn’t going to be as harsh pr prolonged as many are predicting, and that the naysayers (of which there are many) are over reacting. One thing is for sure, problems in the mortgage industry will have ripple effects that extend into every other area of the economy.
In the U.S., this is especially true due to the sheer volume of money pumped into consumer’s pockets as their home values skyrocketed in the last 5 – 7 years. Many pulled out newly created equity for all many of projects, from new SUVs (stupid use of home equity) vacations (ditto) to home improvements, remodels and new homes. That’s driven all areas of the economy to greater heights, and while a fun time for all, bound to correct sooner or later. It was, as the environmentalists say about our consumption of consumer goods, unsustainable.
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