Page 2 of
2 Pain relievers should share the
pain By Julian
Delasantellis
the capitalists
themselves, they're just fine with as much
government support and largesse that they can get
their hands on-well; who says no to found money?
Proposals being floated from the financial
community are calling for the government to buy up
just about every single subprime, and a whole lot
of the now endangered Alt-A higher quality
mortgages as well. If the government wanted to
then show a measure of forbearance or mercy to the
borrowers that the private sector is now choosing
not to, it then could - it's no skin off my back
then, say the lenders.
This approach is
evocative of the Great Depression era US Home
Owners' Loan Corporation, set
up by president Franklin D Roosevelt and Congress
at the start of the New Deal in 1933.
One
might find it surprising that these bankers are
turning to the example of FDR and the New Deal for
their salvation, as, for most of them, their only
real connection to that former president and
liberal icon is seeing his name alongside
obscenities on the walls of the men's room at
their country club. Obviously, in deciding between
ideology and real money, ideology is being thrown
a ball and told to play outside.
If the
private financial industry's solution to these
problems is to have the government pay to fix
them, it shouldn't be all that surprising that
government's solution to these problems is, of
course, to have the private financial industry pay
to solve them.
Floated from out of the US
Office of Thrift Supervision (OTS) last week was a
new way to deal with the under-water homeowners.
In essence, instead of having homeowners either
head to bankruptcy court or stay in their houses
until they were grey and grizzled, homeowners
could get out of this situation by refinancing
their mortgage, and having their mortgage holder
issue what is called a "negative amortization
certificate" for the difference between the
remaining mortgage and the home's now lower,
assessed value.
"Few details about the
plan have been settled" according to the
description of the proposal on CNN.com, and that's
the problem. Once the "negative amortization
certificate" pops out of the printer, it's not at
all clear just who then would have what to do with
it.
If the homeowner wants to stay in his
home, then, for him at least, negative
amortization certificates are clear winners. When,
a few years ago, most of the subprime borrowers
got into their mortgages on their overpriced
properties with the low initial "teaser" mortgage
rates that the banks dangled in front of their
eyes like a worm lure on a fishing line, they were
promised that they could always spare themselves
the pain of the resets to higher rates and
payments by using the house's inevitable increase
in market value as the equity required to
refinance into more affordable fixed-rate
financing.
As home prices fell, the home
equity needed to refinance evaporated, so the
subprime borrowers were left defenseless against
to full gale force pain of the resets, and the
subprime crisis commenced.
For these
borrowers, negative amortization certificates
provide a clear benefit - they get a much lower
monthly mortgage payment. At least temporarily,
the holders of the mortgage will do worse, for a
good part of the value of their ownership in the
mortgage has been now converted into the
certificate. The plan's originators at OTS say the
banks and other holders of the mortgages, since
they will save the average $50,000 it costs to
foreclose on a delinquent borrower, will be fine
and on board with this.
Sure they will.
When things really get hazy is if the
homeowner wants to sell the house. Now he can, his
mortgage balance has been reduced, so he won't
have to face a Freddy Krueger like figure at the
closing table demanding tens of thousands of
dollars to wake from his nightmare.
What
about the negative amortization certificate? Since
its creation it has become a sort of semi-secured
lien on the property. When the house sells, any
difference between the re-financed mortgage amount
and the selling price, up to the value of the
original mortgage, supposedly goes back to the
holder of the certificate, the mortgage holder,
after which the certificate then goes out of
existence.
No recovery - what
then? But what if the house's selling price
does not recover? Who carries that debt, the value
of the negative amortization certificate created
when the original mortgage was refinanced? The
buyer, for all eternity, like a borrowing Original
Sin, paying for a financial mistake he made in his
20s all the way to the nursing home? Or does the
holder of the negative amortization certificate
just eat the loss, laugh it off with a hale and
hearty guffaw, "win some, lose some"? Yeah, right.
The real problem underlying all these
solutions is, of course, that in media- and
image-sodden America, it's more important to look
like you're solving a problem than to actually be
solving one. Since the subprime crisis slammed
into the markets like a planet-killing asteroid in
mid-summer, various other well-trumpeted and
fanfared solutions have been advanced that
promised to solve the troubles.
From
Countrywide's September offer to voluntarily
re-finance most of the subprime mortgages under
its purview (an offer which, like the subprime
mortgages themselves, failed upon reading of the
fine print) to the US Treasury’s "Hope Now" (see
Hope Now - Sorry, wrong
number, Asia Times Online, December 12,
2007)and "Project Lifeline" initiatives, the
public relations company and media consultant
vetted but ultimately pointless and failing
efforts by the governing elite to solve the
problem grow ever more feverish and frenetic, as
the plight of those actually caught up in the
crisis grows ever more desperate and dire.
In 1992, Bill Clinton got votes by saying
that he "felt your pain" to those Americans
suffering the early 1990s' economic woes brought
about by the Savings and Loans crisis. Today, it
might help if our current elite actually felt and
shared in the pain of those caught up in this
economic crisis. That they could do by, instead
passing all the cost of solving the problem to
someone else while still grabbing for all the
credit, they actually put some of their own money,
some scratch on the table, to feel the same pain
of sacrifice that millions of Americans are now
being forced to suffer.
Julian
Delasantellis is a management consultant,
private investor and educator in international
business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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