A bailout plan for Wall Street that does not address the problem mortgages that have led to frozen markets in mortgage-backed securities and their numerous derivatives will ultimately be far less successful—not to mention far less fair to the average homeowner or taxpayer—than one that addresses the problem from the get-go.
The Center for American Progress supports several proposals that return the focus to the underlying cause of the economic spiral: unsustainable mortgages and escalating foreclosures that are dragging down home values, adding to the inflated supply of homes for sale, and sucking wealth from the American economy. These proposals would keep families in their homes, thus also protecting the home equity of their neighbors and communities. Taken together, these proposals would constitute a serious plan for dealing with the root cause of the crisis. Specifically, our plan includes:
Judicial modifications for mortgages on primary homes under bankruptcy
While investment properties and second homes have long been able to be adjusted under bankruptcy, current law precludes modification of loans on primary residences. The Center believes that as a matter of fairness, the bankruptcy laws should be modified to allow these modifications to be made. In the context of the current crisis, moreover, we believe providing borrowers with the opportunity to seek relief in Chapter 13 bankruptcy can be an important incentive to bring servicers to negotiate modifications with borrowers at risk of losing their homes.
Treasury purchase of mortgages, loan pools, and servicing rights
Our plan calls upon Treasury to limit its purchases primarily to mortgages, loan pools, and servicing rights. After acquiring the rights to the mortgages, Treasury would triage them to determine which are current and which are delinquent.
Current loans would be sold to Wall Street in new securities, which could be bought with the liquidity provided by the initial sale, while the delinquent mortgages would be analyzed and restructured to match the borrowers’ capacity to repay. Those that cannot be made to be sustainable would proceed toward foreclosure. But the many additional homes would be prevented from falling into foreclosure. Treasury would then resell the restructured mortgages back to Wall Street with a guaranty and make money on the difference between the steeply discounted purchase price of the non-performing mortgage and the price of the new, sustainable mortgage. This process would keep many borrowers in their homes while providing greater certainty to Wall Street by eliminating troubled securities and replacing them with far less risky ones.
Getting mortgage servicers to participate
The Center believes an optimal solution to the issue of servicer participation is a modification of Real Estate Mortgage Investment Conduit laws and an exception for program participants from certain accounting standards. Under CAP’s proposal, REMIC status would be denied to any trust holding these securitized assets whose instruments block sales of mortgages or pools into the program. Similarly, we propose a fix to accounting rule, FAS 140, so participation does not blow up the Qualified Special Purpose Entity, or QSPE, tax status of these trusts.
Under the REMIC fix proposed by CAP, the government is merely changing the tax code, which it does all the time without paying any compensation. While there may be lawsuits, we believe the government would be in a very strong position to win such suits and not have to pay any compensation at all.
Read more about CAP’s proposals to help homeowners during the economic crisis: