the vast securities-manufacturing business that evolved over the past three decades and went into overdrive after 2000 may never recover.
This is my view. I think of securitization as like the dead parrot in the famous Monty Python sketch. Trying to rescue it or revive it strikes me as madness. I keep saying that we need to revert to the mortgage finance system of forty years ago.
I appear to be in the minority. Most people seem to think that the parrot is “just restin’,” and that at some point we are bound to see a comeback from Freddie, Fannie, credit default swaps, and all the rest. I don’t think so. Not in a free market.
Speaking of futility, the Wall Street Journal looks at the attempt to keep borrowers in their homes.
[FDIC chief Sheila Bair] outlined her ballyhooed plan to prevent an estimated 1.5 million foreclosures by the end of 2009. She plans to accomplish this feat by modifying more than two million loans at what she estimates would be a taxpayer cost of $24 billion.
Three months into the IndyMac experiment, the FDIC has modified all of 5,400 delinquent loans. It’s too early to tell how many of these borrowers will default again, but since even the modified monthly payments consume 38% of borrowers’ pretax income, expect a lot of failures. The FDIC uses a re-default rate of 40% in its models but believes the actual rate will be lower. LPS says more than 50% of loans typically go delinquent again after modification.
The administrative cost of loan modifications is much higher than the cost of just paying these people’s moving expenses and holding the door for them so that it does not hit them on the way out. There probably is a worse idea for dealing with the crisis than loan modification, but right now I cannot think of one.
UPDATE: Lawrence H. White blames the Fed and the Community Reinvestment Act. I rejected that narrative long ago. Fed Governor Randall S. Krosner picks apart the CRA part of the narrative.
READER COMMENTS
DW
Dec 3 2008 at 11:29am
You should use the dead parrot analogy whne you testify to congress. You’re more likely to get their attention if you give them a colourful soundbite they can parrot (hehe) to the press.
TDL
Dec 3 2008 at 11:47am
I don’t see CDS going away, at least not for plain vanilla debt anyway. If all the securitized product disappears, certainly those CDS will go away; but why would all CDS disappear?
Regards,
TDL
Steve Sailer
Dec 4 2008 at 2:19am
The CRA is a minor deal compared to George W. Bush’s 2002-2004 jihad against down payments, which he repeatedly denounced as the primary barrier that must be overcome to achieve his goal of adding 5.5 million minority homeowners by 2010. Google “White House Conference on Minority Homeownership” for all the gory details of what Bush and Rove were up to in trying to convert Hispanics to Republicans by helping them become homeowners.
Mencius
Dec 4 2008 at 2:58am
Arnold,
Perhaps you haven’t read Stan Liebowitz’s Anatomy of a Train Wreck.
Defenses of “mortgage innovation” and the CRA, such as Kroszner’s, typically focus on redefining the problem as an infinitesimal set of mortgages, then arguing that this set is infinitesimal. A common way to do this is to define the subset of mortgages affected by the jihad against down payments according to the narrowest provisions of a single law, such as the CRA, perhaps with some bogus Boston-Fed type data thrown in.
No one who has read Liebowitz, Husock, etc, can remain under this illusion. Mortgage innovation was not a single law. It was an industry-wide vortex of graft. (And Austan Goolsbee must wish he could have the TimesSelect memory hole back.)
Vince
Dec 4 2008 at 12:28pm
Chairman Blair,
At least your Office is trying to serve consumers instead of only providers (Financial Industry). As a consumer who is a good customer and who pays a mortgage that has an off the wall loss of value of property in Florida and who wants to re-finance at a sane current appraisal. The FDIC is trying to avoid more mortgage based problems for the good and surviving consumers. Give it a try, forebearance works with students post graduation!
Lawrence H.White
Dec 5 2008 at 9:03am
Arnold,
Could you please link me to your explanation of why you reject blaming Fed cheap-money policy and the regulatory mandates for riskier mortgages? (By the way, I don’t place much emphasis on the CRA as such, so I have no trouble accepting Kroszner’s evidence that it directly accounts for no more than 8% of the subprime mortgages. I put more emphasis on Fannie and Freddie.)
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