The announcement yesterday of new procedures for streamlined modifications of primarily prime mortgage loans in trouble was a perfect example of a good (albeit overdue) program being drowned by a really inept rollout.
Briefly, Fannie Mae, Freddie Mac, their conservator the Federal Housing Finance Agency, the Hope Now Alliance and a group of large banks announced standard procedures to do quick modifications-involving primarily an appraisal and verification of income-of seriously delinquent loans in either Fannie or Freddie MBS, or in the portfolios of either the GSEs or the banks. There are clear limits on what is involved. The big one is these are largely prime loans, and loans for which the servicer has relatively undivided loyalties. They are not the privately-securitized sub-prime and Alt-A loans that have caused the bulk of the problem to date, especially in lower income communities. That's a big limitation, but the fact is that the prime foreclosure rate is increasing steadily. And as of June 2008, there were about 373,000 Fannie and Freddie owned or guaranteed loans (many of them prime) that were seriously delinquent, and the number was climbing fast. That's Fannie and Freddie alone, not counting loans held in bank portfolios.
Ellen Seidman, director of Financial Services Policy in the Asset Building Program, recently sat down for a short discussion with Michael Barr of the University of Michigan Law School and Eldar Shafir of Princeton University for a short discussion on their new paper Behaviorally Informed Financial Services Regulation.
When the Wall Street Journal lists the Community Reinvestment Act as only the 6th Washington policy responsible for the current mess-behind such items as "The Federal Reserve," "Banking regulators" (the Fed gets dinged in this category too), and "a credit-rating oligopoly," I suppose those of us who think CRA did (and continues to do) some good should be pleased. After all, it was not so long ago that CRA was being fingered by conservative commentators as "the" cause of the crisis. But just to remind folks why CRA shouldn't even be on the Journal's list at all (their major compliant is that CRA "compels" banks to make loans to "poor borrowers who often cannot repay them," which describes one hell of a lot of not poor borrowers who banks made loans to without any prodding), I thought it would be useful to republish this blog's first posting. Here it is:
Holman Jenkins ends his opinion piece about Fannnie Mae and Freddie Mac in Wednesday's Wall Street Journal with the memorable line: ". . .and (if we really feel more subsidy to homeowning is needed) insisting that Congress do it the fiscally honest way, through the tax code." Come on, Mr. Jenkins, if we want to be fiscally honest, we should do it through appropriations. Or at least through a capped, income-phased-out, refundable tax credit, which somehow I doubt was what he meant (although I'd be pleased to learn otherwise).
The standard tax code technique, an uncapped deduction, ends up subsidizing those who don't need it and neglecting those who do. The fiscal 2009 budget projects tax expenditures of over $100 billion for the home mortgage interest deduction. Honest budgeting would recognize that much of this goes to people who don't need it and artificially props up house prices. If we want to subsidize homeownership honestly, we'd get rid of the tax deduction and appropriate money to be directed to those who would not be homeowners without the subidy. But then, of course, we'd have to get serious about making the Department of Housing and Urban Development work.
This afternoon FDIC Chairman Sheila Bair and her team took the next important step in making good on their promise to treat borrowers whose loans are held or serviced by IndyMac as the Chairman has urged other banks to treat their borrowers. Simply put, the FDIC announced a blanket loan modification program, under which the loans of borrowers in default or having trouble making their mortgage payments will be automatically modified into fixed rate loans whose terms will be set so that housing debt consumes no more than 38% of the borrower's income.