Will FDIC's Bair Get It Right?

Every commentary regarding the dire straits the general economy finds itself in always makes reference to housing and mortgage issues. Why then, have not more thoughtful efforts come forth the resolve these twin problems?

Sheila Bair appears to have taken the point position within the mainstream media for the current agency heads. I really hope that she get it right, as there are not many bullets left to fire.

By getting it right, I am urging that she remove housing and mortgage problems from the current economic equation, thereby calming the market and allowing the real issues to be seen.

It wasn’t just housing that got screwed up with ineffective credit controls and lax regulatory oversight…the stock market is a mess, and not just because of housing…

The leveraging that is talked about really starts with leverage income…..there was obviously a great deal of balance sheet leveraging…but it starts with over-valuing income…and income is declining…household incomes are down for many Americans, and corporate incomes will follow, and they already have started to do so.

When 45 PR became the 15 PE for stocks….and 65% debt ratios on Fannie Mae loans became the new 36%....trouble had to be close behind…

Sheila Bair has a well directed concept that needs to be refined. What I see is this, from my seat on Main Street:

1. If the statistics are right, only about 5% of homeowners are really in trouble…this is like an iceberg…there is more trouble below the waterline…
2. I believe that, for perhaps 30% of American homeowners, spendable household income has declined…and I will guess it is down by around 30%, or more…
3. With about 2/3 of households in ok financial shape…that leaves 1/3 in trouble, or on the verge of trouble. I believe that the problem is much broader than just those homeowners current in default of their mortgages…
4. Any solution has to be broad enough to deal with the broader market…
5. Any solution has to preserve the value of the debt that has been created by homeowners for the time being…the amount of debt cannot be discounted today…nor can the coupon rates of the debt be discounted today
6. In the current market climate, there is no effective way to value homes or mortgage assets…
7. Any solution has to discount the payments for a period of 3-5 years minimally…to allow the market to stabilize and for homeowners to find acceptable income and/or to shed debt…

I challenge Sheila Bair to Google my name, “John Preston + my plan to repair housing in America” (see here). There are a couple of other similar plans which have been floated in the media. My plan may be the most workable, least costly and more efficient plan which has been articulated in the media to date.

Disclosure: none

Comments

[kebu77:]

"In the current market climate, there is no effective way to value homes or mortgage assets…"

Not true. But, due to the structural deficiencies of the current system, the way is case-by-case - - in bankruptcy court where cram-downs can occur as justified on the merits of a borrower's excusable insolvency and the facts of that borrower's lending experience (negligence, poor underwriting, bad advice, etc.).

But this cannot happen unless the bankruptcy code is amended to allow judges to modify existing loans.

When mortgage servicers can refuse to assign a person to an account, make you talk to a different person each time, refuse to return calls, refuse to use email, lose faxes and mail or deny they were sent, and delay, delay and delay, the system is broken and, given the current high volume of backlogged cases and the many new ones to come, cannot be fixed. It's time for judges to level the playing field.

2008 Oct 27 02:06 PM