Legal Commentary

HOLC Beats RTC

By Big Tent Democrat

Jeralyn posted Hillary Clinton's great speech on our current financial crisis and I think the most important discussion from that speech was Clinton's championing of the HOLC (Home Owners Loan Corporation) model over the RTC (Resolution Trust Corp.) model. I urge you to watch the speech. In the meantime, hear is a nice post from December 2007 from the Consumer Law and Policy blog on these competing choices, highlighting the Center for American Progress proposal.The post:

The Center for American Progress is calling for an updated version of the Homeowners Loan Corporation, the New Deal agency that rescued thousands of Americans from foreclosure, and was the predecessor to FNMA and securitization. In the Depression, most home mortgages were interest-only loans for five years with balloon payments. This required homeowners to refinance frequently and left them at the mercy of lenders. Sound familiar? The situation is not unlike that of homeowners with subprime teaser-rate ARMs, who borrowed on the premise that they could refinance before the payment increase. The HOLC stepped in, buying mortgages from lenders and issuing bonds to finance the purchases. In the process, HOLC created the amortizing, monthly payment, long-term mortgage, the true affordability product of the mortgage industry (and you thought the private market was the source of financial innovation!) In the words of FDR: " to protect home owners from inequitable enforced liquidation, in a time of general distress, is a proper concern of the Government." For more on the history of HOLC, including its role in inventing racial redlining, go here.

The Center's proposal calls for a new HOLC, that would purchase delinquent or at-risk mortgages that cannot be refinanced because they exceed the current property value. The current holder would be offered an amount equal to the property value. Although the holder would lose money, the loss would not be as great as if the holder foreclosed, and had to incur more expenses and delay. The new HOLC would issue bonds, in other words, securitize the purchased loans, and then service them or contract out servicing until they were paid off. Expect to hear more about this proposal in the coming months.

I hope to hear a lot more about it right now. Bailing out Wall Street is not the idea. Bailing out the American economy and our financial system and distressed homeowners should be the goal. This should not be about Morgan Stanley, it should be about the country. HOLC is about the country. An RTC solution would be about Wall Street.

By Big Tent Democrat, speaking for me only

Full post as published by TalkLeft on September 19, 2008 (boomark / email).