Neel Kashkari says political realities made it impossible for the government to do anything that would actually solve the housing crash. Kashkari is that Goldman Sachs guy who became an assistant Treasury secretary under Henry Paulson. He was the head of the Office of Financial Stability and ran TARP, where he worked on all those failed plans, like HARP and HAMP. Now, he’s with the gigantic bond fund, PIMCO. It’s still true, he says.
Given this political reality, we need either to agree, as a nation, to spend substantial taxpayer dollars to reach more homeowners, or the federal government should focus on programs to quickly move troubled homeowners to affordable rentals and, most important, focus on pro-growth economic policy to create jobs.
Kashkari is probably talking his book when he suggests throwing money at homeowners. it’s likely that PIMCO would profit handsomely if the government offered tons of cash to strapped homeowners to give to their lenders. You will recall that the goal of TARP as conceived by Paulson was to use federal dollars to buy up real estate mortgage-backed securities from the teetering banks at prices far above the market. There is still a lingering hope that Geithner will find some way to do this. Maybe they can do a settlement agreement with giant banks calling for principal reductions on firsts without getting rid of the seconds. Oh wait, that already happened.
Why not at least mention cramdown? I know it’s dead too, killed by the banks, but it was a brilliant plan, especially because it doesn’t cost taxpayers anything, and those homeowners who don’t want to help their neighbors can’t complain. I first heard about it in late 2007 at a bankruptcy seminar. My friend explained that the Bankruptcy Code would be amended to allow people to cram down a first mortgage in Chapter 13. The main requirement for filing Chapter 13 is having a reasonably stable income.
The Debtors and the Lender would go before a Bankruptcy Judge to determine the fair market value of the home. The Court would have the power to lower the mortgage balance to that amount, and to reset the monthly mortgage payment to reflect a term of 30 years at a fair interest rate. All under water liens would be cancelled. All junior lienholders, and the first mortgage holder to the extent of its deficiency, would be treated as unsecured creditors and would be paid some percentage along with other unsecured creditors over five years, after which the balance of the unsecured debt would be discharged in full. The net result would be families staying in their home with enough income to pay all their debts. On the other hand, if the family couldn’t make the payments, they could convert to Chapter 7, dump their debt, and move ahead.
So, what’s the problem? Banks hated the plan. They made up a bunch of PR reasons why it was a bad idea, like possible increase in interest rates in the future. Those excuses were despicable lies. The bankers feared that this change would give households power to force them to negotiate instead of acting unilaterally. Cramdown focused on the results of years of bank lobbying state legislatures to take from borrowers all the protections created by the Common Law or consumer protection statutes.
Even worse, it would force lenders to prove they had rights in the collateral. That wouldn’t be possible in many cases.
Banks large and small called in favors from their gullible and/or corrupt congressionals, and killed the bill. The decision to kill it was a rare example of bipartisanship, with plenty of Democrats voting no.
The hypocrisy of the vote is painfully tangible. Both parties pretend to believe in free markets, but here was a chance to even up a market that was totally one-sided in favor of the banks. Congress made sure the banks would have all the market power and the homeowners would have none. Then to top it off, they claimed it would be immoral for homeowners to walk away from their debts. They pretended that underwater homeowners caused the Great Crash was their they should bear all the losses, even though banks had rigged the game.
And, of course, no one goes to jail.
With that huge victory in hand, Kashkari wants more cash for those cheating lenders. No wonder these guys are rich, they never stop asking for other people’s money.