Views side by side: read A Mortgage Bailout? [1] by Brian Wesbury and Robert Stein for another view, and BMI Adviser Gary Wolfram's Econ 101: The Problem with Bailouts [2].
Last week President Bush and Treasury Secretary Paulson announced that the major players in the mortgage credit disruption had come to a consensus on how to move forward. They pointed to a statement put out by the American Securitization Forum which represents the people who own and who service the vast majority of American mortgages.
The General and Financial press sprung into action, labeled it a bail-out, and went on to debate the same old hackneyed questions about whether the ‘bail-out’ went far enough. The left was assigned its traditional ‘c’mon, have a heart’ role, while the right was assigned the Marie Antoinette ‘let them eat Cato’ part. Lefties complained that ‘predatory lenders’ were getting away with something, while Righties gave monologues on the death of personal responsibility.
We could have been spared all of this if the press had published this sentence:
The servicer will not take any action that is prohibited by the pooling and servicing
agreement (“PSA”) or other applicable securitization governing document, or that
would violate applicable laws, regulations, or accounting standards.
It’s from principle one of page one of the plan (aka the Executive Summary of the Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans). In other words, any reasonably literate reporter who decided to read the plan would have learned that it does not violate the contract rights of the lender or the borrower, and they could have done it in less than two minutes reading time.
This confirms my long-held suspicion: The reporters don’t actually read the reports! I can understand why. These guys are j-school grads, not biz school grads. Plus, the reports are long. I would not have read 40-plus pages of material but for one thing – I wanted to know the truth.
This plan was written by the people (primarily bankers) who issue, service, and in many cases still own mortgages. It is not designed to take away their right to enforce the contracts. It is designed to protect them from frivolous lawsuits when they decide to renegotiate with borrowers who cannot afford to make their payments. It is a simple acknowledgment of the practical fact that bankers don’t want to foreclose when they can avoid it.
They don’t want to own houses; they want to own mortgages, and it’s in their interest to change the terms to give breathing room to troubled homeowners. The industry has been saying for months now that they want to renegotiate, but that they are afraid to do so in the litigious environment that is American securities law.
The administration didn’t coerce or cajole the industry into this; the administration gave moral and legal cover to the industry to do what it already knew was in its best interest to do.
If you don’t believe that, then look again at the chart that accompanies this article. The homebuilders index is the industry; it’s the builders and mortgage issuers and the mortgage holders. If they were getting shafted, why did they stage such a dramatic, forceful and long-overdue turnaround? Ditto for the banks.
Some commentators have complained that government “interference” in the mortgage contracts will cause lenders to demand higher interest rates in order to compensate them for the risk that their contracts can now allegedly be torn up by borrowers. The theory is right, abrogating contract rights would, indeed, cause an explosion in mortgage rates.
The problem is that the week in which the plan was systematically being leaked to the press, mortgage rates were falling to the lowest level in four years. Builders and banks rallied, and mortgage rates fell because the American Securitization Forum plan provided what its members really needed – the flexibility to renegotiate at a rapid pace without violating existing contracts.
All of the media attacks on the plan could easily be retroactively made accurate if the editors would do one thing. If they ran a ‘search’ command on all of the news copy and
Instructed the program to delete all mentions of the words “Bush” and “Republican” and replaced them with the words “Clinton” and “Democratic,” all would be well.
The Democrats’ government-mandated foreclosure bans and interest rate freezes would indeed be a bailout. It would violate the sanctity of contracts. It would send interest rates skyrocketing. It would hurt shareholders (like me) in order to help homeowners. It would be exactly what critics say the Bush/Paulson plan is. In other words, it would be a welcome change from the typical mortgage coverage we’ve seen this year – it would be the truth.
Jerry Bowyer is Chief Economist for BenchMark Financial Network and a frequent guest on CNBC and the Fox News Channel. He wrote this column for the Media Research Center’s Business & Media Institute.
Related commentaries on this issue:
A Mortgage Bailout? by Brian Wesbury and Robert Stein [1]
Econ 101: The Problem with Bailouts by Gary Wolfram [2]