I missed it the first time around, but I wanted to flag this WSJ editorial by Barbara Novick, a vice chairman of BlackRock, titled Why a Foreclosure Moratorium Is a Bad Idea.
So what’s the answer to this mess? Bankruptcy reform. A special chapter of bankruptcy should be created to fix the mortgage crisis and hasten a housing recovery, while protecting borrowers and investors alike. Regulators would identify an affordable total debt-to-income ratio for overburdened borrowers. Qualified individuals could then file for this special bankruptcy by presenting all their debts—mortgages, credit-card bills, car loans, and the like—to a court (or an arbitrator). No debts would be excluded, so the borrower’s entire balance sheet could be addressed.
The court would then rank those debts so that a borrower’s debt would be reduced or eliminated in order of seniority. If the court and the borrower could not settle on a sustainable payment plan, then foreclosure and liquidation proceedings could commence.
To relieve banks from having to absorb all the losses associated with borrowers’ bankruptcy plans at once, regulators could allow losses on home-equity loans and credit cards to be spread over an extended period. They might also include a “sunset clause” so that these special bankruptcy rules expire once the mortgage crisis is resolved.
I can guarantee that if bankruptcy reform was seriously back on the table then calls for a foreclosure moratorium would go away. Indeed it’s because our courts have been corrupted through the current foreclosure processes, and the normal reset mechanism for debts in courts has a defect which excludes mortgages (because nobody ever thought there could be a nationwide housing bubble before), that bankruptcy reform would be the ultimate safeguard.
Also check this out. I’m not sure if this Blackrock Vice-President won’t be satisfied until we have Canadian healthcare and we’ve eliminated the Pentagon, but she certainly is comfortable acknowledging that HAMP has major problems, predictable problems, and that it’s not helping people at the margins (my bold):
Just look at what happened when the federal government set up a similar market-distorting program last year, the Home Affordable Modification Program (HAMP). Under HAMP, investors with first-tier claims on delinquent mortgages have been forced to take a back seat to holders of second mortgages and other consumer obligations like credit-card debt. In essence, primary mortgage contracts—which promised investors that they’d be paid back first if a borrower defaulted—are being invalidated and investors are being sent to the back of the collection line.
Supporters argued that HAMP would help people stay in their homes. But that hasn’t happened. The federal government has made fewer than 500,000 permanent modifications, despite a stated goal of helping at least three million homeowners.
The primary beneficiaries of HAMP have been holders of unsecured consumer debt (credit cards, car loans, etc.) that have benefited from borrowers’ reduced debt burden, despite the dismal reality that half of all borrowers emerge from HAMP with a total debt-to-income ratio greater than 63.5%, according to the most recent Treasury data.
Yves Smith covers the latest SIGTarp report on HAMP. Two things to this: First if you look at arguments from the late 1990s as to why we shouldn’t have mortgage lien-stripping as a response to the new issue of having multiple liens on a mortgage, this is a feature, not a bug. Back in 1999: “By limiting the resources that stand behind the loan to the value of the mortgaged property itself, the law would transform HLTV lending from its current form—a relatively senior, collateralized claim on the consumer’s wealth—to essentially a junior claim on the amount of housing wealth (but not the actual house) of the consumer….Cram-down would essentially eliminate that special bargaining power of the HLTV lender.”
Actual investors, the owners of capital we want to be able to make loans to people who want to buy mortgages, now have other claims on their collateral, often without their knowledge and certainly without their permission. If this existed in the corporate market it would collapse so fast we’d be in the stone ages. That’s before we realize that many of the servicers who need to be handling these negotiations work for institutions that also own the extra claims. I’m having a hard time thinking about how we could have set our property rights and infrastructure into a worse situation for dealing with the aftermath of a financial bubble.
Second: This leads right into what Zach Carter calls The Elephant In The Foreclosure Fraud Room, the second lien problem. This is what the editorial means by “Under HAMP, investors with first-tier claims on delinquent mortgages have been forced to take a back seat to holders of second mortgages…”
Remember that the financial sector is primarily two things: a medium of exchange for buyers and sellers (cash, checks, credit cards, money orders, etc.) and a matcher for borrowers and lenders. People like Blackrock want to lend money to homeowners who want to borrow to buy a home and build equity to transfer to their children. We know that homeowners are unhappy with the financial system; what does it say when lenders are also taking to the editorial pages yelling at the financial system? If it can’t make either side happy, what is it even accomplishing?