As you continue to evaluate the legislation emerging from the US Senate to address the housing crisis, I thought you might be interested in the thoughts of Timothy A. Canova, an associate dean and professor of international economic law at the Chapman University School of Law (you can find his bio at http://www.chapman.edu/law/faculty/canova.asp). Dean Canova, an expert on international monetary and other economic legal issues, offers the following thoughts:
I would say that it compares favorably with the Treasury Department’s recent proposals which merely called for lenders to voluntarily freeze interest rates for a month or two for homeowners facing delinquency on their loans. Treasury Secretary Henry Paulson has also called on credit-rating agencies to do a better job rating debt securities and derivatives. Finally, Mr. Paulson called for a review of capital standards for banks. All of these proposals were voluntary in nature, and rather unlikely to stem the housing slide. Perhaps they were not intended to do so. There are many in Washington, D.C. and Wall Street who would like to see the housing market find its own floor. The proposal for new capital standards could actually lead to further restrictions in bank credit.
The legislation emerging from the U.S. Senate would be a modest improvement over such administration proposals. Some of the proposals seem more designed to help special interests than to resolve the crisis in housing and mortgage markets. The tax benefits for homebuilders, in and of itself, would not result in any new spending or investment in construction. Other measures would presumably help increase the demand for housing, such as the new tax credit for homebuyers. The proposed $10 billion bond authority for refinancing subprime mortgages would presumably reduce the supply of unsold housing by reducing foreclosures. But with a housing market in the trillions of dollars, these amounts are but a drop in the bucket. Likewise with the proposal for $4 billion for state and local governments to help buy and rehabilitate foreclosed homes, and the proposal for $200 million in credit counseling for homeowners at risk of foreclosure.
The one potentially big proposal is also the most controversial: the proposal to amend the Bankruptcy Code to allow judges to rewrite the terms of existing mortgages, to lower interest rates, extend payments and cut principal payments. This is something that could actually address the hundreds of thousands of borrowers facing possible foreclosure. But it’s not surprising that there’s fierce opposition from lenders since this would essentially impose the costs of loan workouts onto lenders.
Other proposals introduced in Congress (by Senator Chris Dodd and Congressman Barney Frank, for instance) would seek to modify the terms of existing mortgages by having a government agency (either new or existing) purchase hundreds of billions of dollars in mortgages. This would transfer the costs of loan modifications onto the taxpayer.
It seems to me that any proposals that fail to modify the mortgages that are at risk of default (perhaps a million such mortgages at present time) will fail to achieve a floor on housing prices. As housing prices continue to fall, the pain will spread throughout the economy and labor markets, and to the fiscal positions of state and local governments as well. Free-market conservatives in the Bush administration and Republicans in Congress hold to the view that the market will correct itself, and therefore no need for the government to set a floor on prices. The costs and the pain would clearly fall on borrowers themselves. The Democrats favor more government intervention to set a floor on housing prices and arrest the downward spiral in credit markets and the economy. All seem to be divided as to who should pay the cost for setting a floor on housing prices, the taxpayer or lenders.
I would say that it compares favorably with the Treasury Department’s recent proposals which merely called for lenders to voluntarily freeze interest rates for a month or two for homeowners facing delinquency on their loans. Treasury Secretary Henry Paulson has also called on credit-rating agencies to do a better job rating debt securities and derivatives. Finally, Mr. Paulson called for a review of capital standards for banks. All of these proposals were voluntary in nature, and rather unlikely to stem the housing slide. Perhaps they were not intended to do so. There are many in Washington, D.C. and Wall Street who would like to see the housing market find its own floor. The proposal for new capital standards could actually lead to further restrictions in bank credit.
The legislation emerging from the U.S. Senate would be a modest improvement over such administration proposals. Some of the proposals seem more designed to help special interests than to resolve the crisis in housing and mortgage markets. The tax benefits for homebuilders, in and of itself, would not result in any new spending or investment in construction. Other measures would presumably help increase the demand for housing, such as the new tax credit for homebuyers. The proposed $10 billion bond authority for refinancing subprime mortgages would presumably reduce the supply of unsold housing by reducing foreclosures. But with a housing market in the trillions of dollars, these amounts are but a drop in the bucket. Likewise with the proposal for $4 billion for state and local governments to help buy and rehabilitate foreclosed homes, and the proposal for $200 million in credit counseling for homeowners at risk of foreclosure.
The one potentially big proposal is also the most controversial: the proposal to amend the Bankruptcy Code to allow judges to rewrite the terms of existing mortgages, to lower interest rates, extend payments and cut principal payments. This is something that could actually address the hundreds of thousands of borrowers facing possible foreclosure. But it’s not surprising that there’s fierce opposition from lenders since this would essentially impose the costs of loan workouts onto lenders.
Other proposals introduced in Congress (by Senator Chris Dodd and Congressman Barney Frank, for instance) would seek to modify the terms of existing mortgages by having a government agency (either new or existing) purchase hundreds of billions of dollars in mortgages. This would transfer the costs of loan modifications onto the taxpayer.
It seems to me that any proposals that fail to modify the mortgages that are at risk of default (perhaps a million such mortgages at present time) will fail to achieve a floor on housing prices. As housing prices continue to fall, the pain will spread throughout the economy and labor markets, and to the fiscal positions of state and local governments as well. Free-market conservatives in the Bush administration and Republicans in Congress hold to the view that the market will correct itself, and therefore no need for the government to set a floor on prices. The costs and the pain would clearly fall on borrowers themselves. The Democrats favor more government intervention to set a floor on housing prices and arrest the downward spiral in credit markets and the economy. All seem to be divided as to who should pay the cost for setting a floor on housing prices, the taxpayer or lenders.
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