Great ideas (but will they work?)
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Tess Vigeland: Alright — should we start with the mortgage mess again? Oh heck, why not? But where to start?
You’ve heard by now that the Fed cut interest rates this week. It’s also working with central banks around the world to free up the credit system which is making it really tough to borrow right now.
Democrats on Capitol Hill introduced a new bill that would give victims of mortgage fraud the right to sue and then there’s the White House rate-freeze plan.
Marketplace’s Bob Moon weighs whether any of this will really do the trick.
Bob Moon: Well, there goes the neighborhood.
When the guy next door is struggling to save his home, is it in your own best interest to lend a helping hand — and risk getting burned? University of Maryland economist Peter Morici paints that picture in arguing that everyone benefits by coming to the rescue of the millions of Americans facing foreclosure.
Peter Morici: If your neighbor plays with gasoline and their house catches on fire, you could say, “Well, it’s their own fault.” but what if there’s the danger that your house will catch on fire, too?
Morici says everybody should be paying attention to the subprime crisis, including those who’ve always been careful to live within their means and even critics who grumble about struggling homeowners who haven’t been so prudent.
John Taylor heads the National Community Reinvestment Coalition.
John Taylor: I certainly sympathize with people who think, “Well, gee, I did the right thing, why should we be helping them?” If we don’t step in now, those people who did not get a subprime loan, they’re going to lose value in their homes. They’re going to suffer from this, too. We are all in this together, because this foreclosure crisis is going to drag us all down.
At the free-market Cato Institute, on the other hand, senior fellow Dan Mitchell says this isn’t cause for government intervention.
Dan Mitchell: I do not want to encourage imprudent behavior in the future. Let’s do what’s best for the long term prosperity of the American people and the thing that’s good for the prosperity of the American people is to stop politicians from meddling in the market.
But the Reinvestment Coalition’s John Taylor says the free market has already failed here and the government has an appropriate role to play. He’s not satisfied with the Bush administration’s voluntary plan, which leaves it up to mortgage industry to choose whether to renegotiate terms.
Taylor: The government, in recognition of the magnitude of this problem, needs to do what it did with the savings and loan crisis and indeed, with the mortgage crisis in the ’30s when it created the Home Loan Corporation: create a temporary institution that is going to have the resources to refinance, restructure these loans, so that we can prevent as many foreclosures as possible and immediately.
The University of Maryland’s Peter Morici says that kind of government refinancing program wouldn’t just benefit struggling homeowners.
Morici: They can pay off their adjustable rate mortgages, the banks will get back their money, the bond holders will get back their money, and we’ll start over.
And as John Taylor sees it, there would be no need for taxpayers to foot the bill.
Taylor: People would continue to pay on their mortgages. They would also pay the government back upon resale of the property. So it certainly doesn’t need to be any type of a bailout, other than perhaps trying to bail out the economy from falling into a recession.
New bankruptcy legislation pending in Congress might help achieve similar results. Harvard University law professor Elizabeth Warren says homeowners could renegotiate their original mortgage so they owe just the current market value of the home. And that would help them qualify for a more affordable fixed-rate mortgage.
Elizabeth Warren: This can happen. We can refinance these homes at close to 100 percent of the loan-to-value ratio and we just have to write off the rest of the debt. You know, the lenders may not like it, but better to take that hit now than to chase the market further down and write off a whole lot more debt than this a year from now, two years from now…
Which is what Warren fears the Bush administration’s plan will lead to. She says the bankruptcy law would give homeowners more power to deal with their mortgage lenders and wouldn’t cost the government a penny. Still, she concedes there is no magic fix for everybody.
Warren: There are a lot of people in homes today who simply can’t afford them and they’re going to have leave those homes and we’re going to have to get those homes back onto the market. That’s how this world works.
Warren says prolonging the inevitable doesn’t help anybody.
In Los Angeles, I’m Bob Moon for Marketplace Money.
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