‘Puter prefaces his remarks on the Amazing Technicolor Bailout Package/Auto Company Bailout/Mortgagor Bailout with the caveat that he has no greater insight than most on what will or will not work. ‘Puter’s different from most, though, as he admits he cannot foretell the future before starting his wild-assed guessing — uh — informed commentary. However, some things strike ‘Puter as inherently counterintuitive. Take, for example, permitting bankruptcy judges to cram down home mortgage debt.
There are many issues with amending bankruptcy law to permit cram down of home mortgages. Here are a few of ‘Puter’s issues.
How do you properly assess value of an asset that is in free fall (i.e., housing)? It doesn’t seem to ‘Puter that one can accurately assess a rapidly and erratically depreciating asset. Without an accurate assessment of value, bankruptcy judges are likely to exacerbate the problem by overvaluing a house in a declining market, which will not assist bankrupts as much as the Obama Administration seems to think. Further, this rolling spot valuation of collateral property increases uncertainty among home lenders as to the true value of their portfolios. How can banks value real estate secured loan portfolios when the value of the real estate collateral is subject to periodic reassessment by bankruptcy courts? When banks cannot value their portfolios, they are uncertain as to how much retained capital they require to meet regulatory (and good business practice) requirements; therefore, lending dries up as banks hold on to funds to avoid undercapitalization. Further, capital becomes more difficult to raise because equity purchasers will not generally purchase shares in a company whose assets cannot be valued with reasonable certainty. And forget about debt financing in this situation.
Are we going to permit further cram down when housing prices continue to fall? Likely we will. Opening the door in the first instance to cram down makes it more likely that we’re in a race to the bottom. Bankrupts (not in Chapter 7) will refile or reopen their Chapter 13 plans (which last as long as 60 months) as their housing values continue to fall, getting a lower and lower house value, thereby repaying less and less of their loan. All this accomplishes is shifting the risk of a deflating bubble in housing prices from the homeowner and the lender to the lender alone. This changes the calculus of financial stock investors who used to be equal partners in the risk of asset deflation with the mortgagors. Now the stockholders are left to hold the bag alone.
Why would you leave borrowers in homes that they could not afford in the first instance? You shouldn’t. Leaving aside for the moment the moral hazard risk, there are other valid concerns. For example, we lent GM and Chrysler billions of dollars, and within three months they’re back for another multi-billion dollar taxpayer infusion. The same thing is going to happen with home owners. Many if not most will still be unable to repay their loans even after cram down and restructuring of debt terms. In the first round of mortgage loan restructures required by the FDIC in the Fannie and Freddie deabcle, many of the loans that were rewritten returned to default status
within six months. Permitting cram down is only delaying the inevitable for most of the underwater/insolvent borrowers. Many are going to lose their properties anyway, as they could not afford them in the first instance. It serves no good purpose to artificially delay home prices from finding their natural level by attempting to prop up prices in bankruptcy.
Why should borrowers/taxpayers who lived within their means subsidize those who have not? ‘Puter’s of two minds on this one. If ‘Puter trusted the government, it would make sense for the government to assist worthy borrowers who have temporarily fallen on hard times and cannot meet mortgage obligations (divorce, illness, job loss). However, the government has proven itself unable to separate the wheat from the chaff, requiring funding be given equally to the worthy and the unworthy. See, e.g., the Great Society generally.
Isn’t this just a massive subsidy of the hard hit sunbelt areas by the gloomier Northern areas, as most of the precipitous fall in home values has been localized in California, Arizona, Las Vegas and Florida? Yup. But folks in the sunnier climes have a legitimate retort that much of the funding going to bail out cash-strapped states is flowing in reverse. That is, Texas taxpayers are paying for the sins of New York’s government. So it may shake out evenly in the end.
How does this address the oversupply of housing generally? It doesn’t. Many of the houses that are being foreclosed should be torn down or converted to rental properties, depending on the neighborhood characteristics. Only by decreasing the supply of housing will we be able to shore up the housing value. Perhaps it would be better for the government to require bankrupts to either live up to the terms of their mortgages, or walk away from the house in exchange for full forgiveness of the debt. If the bankrupts choose to walk away, the government could reimburse the lender the current fair market value (really, a guess at a number) of the house, so long as the lender tears down the house and sells the property as bare land. This would do more in many areas to stabilize housing values, and it’s a heck of a lot better than the current situation in certain cities like Cleveland and Cincinnati. Think of it as a twist on urban renewal, if you must. Neighborhoods with large numbers of foreclosed homes could either be redeveloped by developers or slowly return to bare land if unneeded.
‘Puter’s got some thoughts on private versus public human services, but those will have to wait for a future posting.
Always right, unless he isn’t, the infallible Ghettoputer F. X. Gormogons claims to be an in-law of the Volgi, although no one really believes this.
’Puter carefully follows economic and financial trends, legal affairs, and serves as the Gormogons’ financial and legal advisor. He successfully defended us against a lawsuit from a liquor distributor worth hundreds of thousands of dollars in unpaid deliveries of bootleg shandies.
The Geep has an IQ so high it is untestable and attempts to measure it have resulted in dangerously unstable results as well as injuries to researchers. Coincidentally, he publishes intelligence tests as a side gig.
His sarcasm is so highly developed it borders on the psychic, and he is often able to insult a person even before meeting them. ’Puter enjoys hunting small game with 000 slugs and punt guns, correcting homilies in real time at Mass, and undermining unions. ’Puter likes to wear a hockey mask and carry an axe into public campgrounds, where he bursts into people’s tents and screams. As you might expect, he has been shot several times but remains completely undeterred.
He assures us that his obsessive fawning over news stories involving women teachers sleeping with young students is not Freudian in any way, although he admits something similar once happened to him. Uniquely, ’Puter is unable to speak, read, or write Russian, but he is able to sing it fluently.
Geep joined the order in the mid-1980s. He arrived at the Castle door with dozens of steamer trunks and an inarticulate hissing creature of astonishingly low intelligence he calls “Sleestak.” Ghettoputer appears to make his wishes known to Sleestak, although no one is sure whether this is the result of complex sign language, expert body posture reading, or simply beating Sleestak with a rubber mallet.
‘Puter suggests the Czar suck it.