Is It Time For An RTC/HOLC-Type of Solution to Clear the Bad Assets Overhang? Sep 18, 2008
- In July the housing bill passes including a major expansion of FHA loan insurance program of up to $300bn where lenders take a haircut if they choose to refinance their mortgages with the FHA. This program is similar to Alan Blinder's depression-era HOLC proposal with the difference that the current FHA program is voluntary. Collective action issues might inhibit the voluntary program's viability. Brady / Eugene / Volcker advocate the re-establishment of a Resolution Trust Corporation (RTC)-like entity to clean the financial system of the increasing impaired assets overhang.
- Brady/Ludwig/Volcker: RTC/HOLC type of insitution does 4 things: 1) buy unviable paper to restore liquidity in markets; 2) buy and hold allows orderly restructuring over time without fire sales; 3) keep people in their homes, lessen foreclosures; 4) help the FDIC in resolving sich institutions.--> the new institution will in the short run require serious money, but ultimate gains to the taxpayer are also possible (as happened with other 2 institutions.)
- Sep 17 (via Bloomberg): The Bush administration is willing to consider a suggestion in Congress to have the U.S. buy distressed mortgages, akin to the role the Resolution Trust Corp. (RTC) played in disposing of bad debts of savings and loan associations in the late 1980s and early 1990s --> Harry Reid: "The U.S. Congress is unlikely to pass new legislation to overhaul financial regulations this year because no one knows what to do. Neither Federal Reserve Chairman Ben Bernanke nor Treasury Secretary Henry Paulson know what to do but they are trying to come up with ideas."
- FDIC: The RTC was a limited-life (the corporation was to terminate by year-end 1996) entity that would manage and resolve all formerly FSLIC-insured institutions placed under conservatorship or receivership from January 1, 1989, through August 9, 1992.--> this time around the problem originated in the unregulated shadow banking system.
- Alan Blinder: To do: Introduce government agency like FDR's Home Owners’ Loan Corporation (HOLC) to buy "old (or upside down) mortgages from banks at a decent discount -->nearly 20% of the HOLC’s borrowers defaulted anyway but HOLC closed its books in 1951 with a small profit. Likely scale of operation today: $200-400bn (see Pollock from AEI for details.)
- Barr/Tyson: Saving America's Family Equity (SAFE) loan plan inspired by the successful Home Owner's Loan Corporation introduced in 1933 to deal with wave of foreclosures:
Treasury and Fed would run auctions in which GSEs would buy mortgages at a discount--> investors take a haircut, but improve their liquidity--> GSEs work with originators to restructure loans to prevent foreclosures. To prevent abuses, only owner-occupied homes would be eligible, no speculators. These SAFE loans will be pooled and repackaged with government guarantee and once the market normalizes, SAFE ceases operation. - Baker: Upside down homeowners are actually better off if they walk away and rent instead; the only ones really hurting are the banks--> The bank bailout crew wants to stop the bloodshed on Wall Street by having the government step in and either guarantee or buy up the bad mortgages.