NYT’s “Bold Idea” – Pass the Trash


Courtesy of Bruce Krasting

As a writer who tries to contribute to the business/economic stories of the day I can tell you that I often sit in front of a laptop and say to myself, “I have nothing worth writing about”. When that happens I often go through the list of past articles and look for something that I can update. Gretchen Morgenson at the NYT must have had a similar state of mind this week. She dredged up some junk from a year ago in her piece for the Sunday Times.

Housing Doesn’t Need a Crash. It Needs Bold Ideas.

Ms. Morgenson wrote an article a year ago that proposed a “solution” to all those underwater borrowers. The solution was elegant and simple. The plan was for all borrowers (including underwater borrowers) to get an automatic refi from Washington. This would allow all of the private holders of junk mortgages to be paid off at par. Those borrowers who were underwater would get low interest refi’s. The result would have been to socialize the losses to all taxpayers. The community banks, the big regional’s, the money center banks, insurance companies and of course Wall Street would be very big winners if this were to have happened.

This would have been a $1 Trillion (minimum) pass the trash to the taxpayers. I thought it was a terrible idea a year ago. I think it is even dumber today. Ms. Morgenson wrote:

If Fannie and Freddie bought these loans out of the pools at par and reduced their interest rates, additional foreclosures might be avoided. The only downside to the government would be if some loans it purchased went bad.

The “only” downside would be more losses for Fannie and Freddie? Don’t we have enough imbedded losses in these two dogs already? The Times describes the loans to be considered, there are big losses in this:

Two-thirds of the 1.6 million loans in those pools were 60 days or more delinquent.

The CBO already puts a number of $400b for the losses at F/F. And the NYT wants to add to that? From the original article on this:

Voilà: Investors who own the underlying interests in the mortgages would be fully repaid and the securitizations would be closed out.

Voila? Where does this brilliant suggestion come from? Two guys who have an axe to grind:

Conceived by two Wall Street veterans, Thomas H. Patrick, a co-founder of New Vernon Capital, and Macauley Taylor, principal at Verum Capital, the plan calls for refinancing all the nonprime, performing loans held in privately issued mortgage pools.

The NYT article is advocating that we take another giant leap toward socializing the financial system. Ms. Morgenson wants Fannie and Freddie to get bigger and to take more losses. This plan would be another bailout of the lenders and those who hold the underlying debt. Why in heavens name would the Times want that? The last thing we should be doing is aiding all the banks and “Wall Street Veterans”. We have done too much of that already.

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