Friday, December 5, 2008

Socializing the Mortgage Industry

That is what Federal Reserve Chairman Ben Bernanke appears to be pushing. Apparently he is suggesting having government agencies buy up bad mortgages and refinance them with much more favorable terms or having the government subsidize private loans.

When privatizing fails then socialize. When socializing is working then privatize. That seems to be the way the system works - by default or by design is a debate for another time.

In this article from Investor News titled Bernanke outlines plans to stem foreclosures we can get a glimpse of the proposal. Lets take a look -

“Despite good-faith efforts by both the private and public sectors, the foreclosure rate remains too high, with adverse consequences for both those directly involved and for the broader economy,” [Bernanke] said at the Federal Reserve System Conference on Housing and Mortgage Markets.

Calling the problems in the housing and mortgage markets “inextricably intertwined” with broader financial and economic developments, Mr. Bernanke listed a slew of “promising options” that are aimed to reduce avoidable foreclosures.

Under one proposal, Mr. Bernanke called on Congress to ease the terms of the government’s "Hope for Homeowners" plan, which allows lenders to refinance a delinquent borrower into a new, Federal Housing Authority-insured fixed-rate mortgage if the lender writes down the mortgage balance to create some home equity for the borrower.

In another proposal, he suggested that Congress lower lenders’ upfront insurance premiums and reduce the interest rate that borrowers pay, which is currently “quite high,” at roughly 8%.

To lower the interest rate, the Treasury could purchase securities issued by Ginnie Mae of Washington to fund the program, or Congress can subsidize the rate.

While these all may be great ideas, the first part of the solution is coming up with a coherent strategy. Throwing a bunch of money at something does not solve the problem - if you do not know what the problem. You have to know who to give the funds to and how. From our previous post on Elizabeth Warren's new position to oversee the bailout -

The government seemed to be lurching from one tactic to the next without clarifying how each step fits into an overall plan.

Yes, coming up with a plan, a coherent plan, is probably the most important step. Now we just need to give Ms. Warren veto and subpoena power.

There is a great video from Jon Stewart that sums up a huge part of the problem -

The whole video is good, but the part directly related to this post starts at about 4:30.

The goal is probably not to socialize the mortgage industry. But it has to be more specific than just "save the economy." Without a coherent strategy we are just cobbling together ideas, wasting money, and increasing the incompetence. And we are paying an incredibly high price in doing so.

1 comment:

Tom said...

The sad thing about watching John Stewart is that he's not really distorting what it is he's showing in an effort to make it funny.

Been a bit busy lately and need to catch up on episodes.

Nice new layout :)