The Financial Crisis in One Sentence
By Arnold Kling
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.