Barron's: Laing's Mortgage Relief Plan Could Actually Work

Three cheers for Jonathan Laing for his proposal in Barron’s this weekend for how to solve the mortgage crisis. Laing’s entire article is definitely worth reading. In a nutshell, though, his plan boils down to four basic actions. Laing says the federal government should:

1. Offer to refinance every U.S. homeowner’s mortgage at a 4.5% fixed rate.
2. Make similar mortgages available to home buyers (just as the Treasury is said to have considered this week).
3. Use Fannie Mae (FNM) and Freddie Mac (FRE) to repackage all new loans as safe securities for investors.
4. Modify the $500 billion of subprime and Alt-A loans in arrears. Extend their maturities to 40 years; in certain cases, pay down principal, as well.

Laing’s plan would provide three huge benefits. First, it would help delinquent borrowers who want to stay in their homes by substantially reducing their monthly payments. Second, risk of moral hazard would be reduced since all borrowers, not just delinquent ones, would be eligible for rate relief. Lastly, the entire economy would get a needed jolt, as borrowers’ reduced monthly payments would cause disposable income to soar.

And here’s a fourth, bonus benefit: lower fixed mortgage rates would go a long way toward stemming the decline in home prices.

I like Laing’s proposal a lot, but would make one important change, and offer an addition, too. First, I wouldn’t set the 4.5% mortgage rate by fiat, but instead would have the Treasury issue debt for Fannie and Freddie or would explicitly guarantee their debt. That would cause the agencies’ borrowing costs to plummet, which in turn would likely lead to 4.5% mortgage rates. Thus mortgage rates would still be tied to some market.

And I’d make one addition: I’d have Fannie and Freddie temporarily ease their underwriting standards regarding maximum loan-to-value, and let any borrower who’s stayed current on his mortgage for the past twelve months refinance at the new lower rate. However, I would suggest that the size of any new mortgage can’t be larger than the mortgage being refinanced.

I also believe Fannie and Freddie should also be willing to purchase subprime mortgage loans created in such a refinancing, priced at a rate set at some meaningful premium (say 250 basis points) over the conforming conventional loan rate.

Jon Laing’s proposal, along with my suggestions, would do a lot of good things to help end the mortgage crisis. The plan would help struggling homeowners stay in their homes, and would ease the downward pressure on home prices. It would reduce the moral hazard that arises from helping only delinquent borrowers. And it would help consumer spending by boosting borrowers’ confidence and putting more discretionary cash in their pockets.

I don’t see a lot of downside. So let’s get going, first by lowering Fannie’s and Freddie’s funding costs, and then putting that funding advantage to work!

Comments

[davidbdc:]

You've got to be kidding me. I've worked hard all my life and paid off my mortgage and now you want me to subsidize people living in homes two times the size of mine?

So if you bought a 500K home but could only afford a 150K home I'll kick in tax dollars to you so that you can pay the same as a 150K home but live in your 500K home.

How about the free box plan.....as in here are some boxes and start packing.

The government cannot legislate the price of assets. All this propping up of home prices misses the point. Prices will decline until there is equilibrium in the market between demand and supply. About time people in this country grew up, became responsible for their own actions, and got a backbone. Buying a home believing it would go up 20% is the same as me buying a stock believing it will go up 20%. No one refunds my investments gone bad why is the government trying to refund people that made investment decisions in housing?

Give me a break.

2008 Dec 09 06:18 AM

[cranyinnyc:]

davidbdc

i think you're missing the most important reason Tom's pushing this -it must benefit his deeply underwater mortgage long positions (how's that IMB position doing for ya Tom?)

2008 Dec 09 07:27 AM

[Parkite:]

Tom Brown is all about supporting proposals that help bail him out of his underwater positions. His fund is experiencing mass redemptions.

2008 Dec 09 12:14 PM

[Jeff from I...:]

I like it.

It wouldn't benefit me because my mortgage is $60,000 on a $650,000 home but it would help other people I know and help the economy which benefits EVERYONE. To the complainers who say it is not fair because I played by the rules its like I tell my kids "life is not fair" get over it. The new rate would offer a spread over the 30 year bonds of about 125 basis points. The government might make money.

2008 Dec 09 12:19 PM

[35offsuit:]

No - life isn't fair - but that doesn't mean we should actively use taxpayer dollars to enact ridiculous policy that is also insanely unfair.

If government stepped forward and said, "No bailouts are coming folks. Strap in and pay your mortgage if you can, and pack up and rent if you can't," you would see an immediate change in consumer behavior.

Those who are waiting for the "big freebie" would realize the gig is up and it's time to start paying.

Those who simply can't pay will become renters.

Bondholders will take a nasty bath - and maybe learn a few lessons.

Would it be painless? Of course not - but we'd get through it and we'd return to a much healthier economy in the years to come.

All of these socialistic bailouts are going to have severe consequences.

The real "subprime" mortgage in all of this is our future - because that is what is being mortgaged...

2008 Dec 09 01:11 PM

[Gus2255:]

As hard as it sounds, i don't think all people defaulting should qualify for any government mortage relief aid / plan. Instead, people should be encouraged not to default:
Lowering monthly payments for people who's struggling not to default their mortage could prove to be a better way of helping the economy as a whole.
Lower mortage payments should be a big boost for consumer confidence and ultimate for the economy, eventually benefiting all, including those defaulting, by stabilizing house prices.
As it's been pointed out in other articles, to aim the mortage relief only to default loans could trigger more defaults, as some people might seek to qualify for the relief package by defaulting. I think high risk loans taken with less than 10% downpayment should not qualify, and banks takings those loans should be forced to write them off.
A good idea would be, in example, to aid only people with household income lower than $250k/year, who put 10% or more downpayment and who are paying up their mortage installments on time. Aid should re-structure their loans and lower their monthly payments, functioning as a national stimulus package.
Some other considerations could be made as well, in orther to help more people. For example, loans on people over 65 could be helped more broadly.

2008 Dec 09 01:27 PM

[brianv:]

I hear what you are saying. However, there may be benefits even for those of us that don´t have a mortgage. If this can stem the slide in home prices that will help you and me. Prices arround me, I live in Maryland are already down 15%. I would not want to see another 15% of my house value go down the drain.



On Dec 09 06:18 AM davidbdc wrote:

> You've got to be kidding me. I've worked hard all my life and paid
> off my mortgage and now you want me to subsidize people living in
> homes two times the size of mine?
>
> So if you bought a 500K home but could only afford a 150K home I'll
> kick in tax dollars to you so that you can pay the same as a 150K
> home but live in your 500K home.
>
> How about the free box plan.....as in here are some boxes and start
> packing.
>
> The government cannot legislate the price of assets. All this propping
> up of home prices misses the point. Prices will decline until there
> is equilibrium in the market between demand and supply. About time
> people in this country grew up, became responsible for their own
> actions, and got a backbone. Buying a home believing it would go
> up 20% is the same as me buying a stock believing it will go up 20%.
> No one refunds my investments gone bad why is the government trying
> to refund people that made investment decisions in housing?
>
> Give me a break.

2008 Dec 09 02:07 PM

[Dave W:]

Why has no consideration been given to the artificially high home values created by the policies of Government agencies, Wall Street firms and Lenders during the real estate bubble?
These policies permitted buyers to purchase more expensive homes than their incomes could support, creating an artificial oversupply of buyers, an undersupply of homes and the over valuation of real estate. These artificial influences on the housing market are being ignored.
All homeowners were harmed by these created home values. Every inflated home sale became a comparable used in many future appraisals.
Is this Fraud for Profit? Government agencies, Wall Street firms, Lenders and the Appraisers knew that home prices were being affected by an undue stimulus i.e.: special or creative financing (Prohibited as defined by FNMA and FHLMC). And no one informed the home buyers.
We need The American People’s Fix. Visit AmericanPeoplesFix.com

2008 Dec 09 02:10 PM

[vreporter:]

The downward pressure on prices is not adequately addressed by any of these schemes. Prices need to come down ON THE BOOKS OF THE BUILDERS! They are holding out for the handout. Time to index the viability of the assessed value with marketable rents.

Only then, are prices in line. Lower rates only delay the inevitable - and that's HOW WE GOT HERE!

No thanks!

2008 Dec 09 10:56 PM