Bankruptcy

Congress to Homeowners: Drop Dead

By Adam Levitin

A draft of the bailout plan is out. And it contains nothing substantive for financially distressed homeowners.

The plan directs the Treasury Department to engage in reasonable modifications for residential mortgage loans it controls and to encourage servicers to do so for loans it doesn't control. As I've explained in numerous posts (here and here, e.g.), Treasury is unlikely to end up controlling many distressed residential mortgage loans directly. And Treasury has been encouraging servicers to do loan modifications since last fall, but with very limited success. There is no reason to think that the bailout suddenly changes anything. In short, Congress enacted some show provisions about consumer relief, but nothing of substance. This is the same move Congress pulled when it enacted the HOPE for Homeowners Act in July. All sizzle, no steak.

This is particularly troubling, for continued foreclosures will only further depress the housing market, which is pulling down the entire economy. What's worse is now it will be the Treasury (and hence taxpayers), who will bear the cost.

[The one possible glimmer of hope is this language: "In addition, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures." Whether on not this will help will depend heavily upon (1) whether the bill is read as authorizing the Treasury to deal with securitization trusts (are they "financial institutions"?) and (2) whether a trustee can accept this sort of guarantee or credit enhancement in keeping with its fiduciary duties. The answer, I think, is maybe in both cases, but this seems to be such an afterthought in the bill that I am not optimistic of it having much effect. Hopefully I'm mistaken.]

Sadly, in this bill Congress focused on politically popular, but really meaningless issues like executive compensation. (Any the provisions they passed aren't super meaningful--they appear only to apply to the top 5 employees, when there are a host of lower-ranking, but high-earning people who worked with MBS--and only impose tax penalties that just aren't that big of a deal to a financial institution.) I don't like the idea of lousy financial institution executives getting rich off of taxpayer dollars, but far better to lose a hundred million even there and to prevent a lot of foreclosures. The net social welfare benefit from the later far outweighs the former.

Also, some of the oversight provisions are really empty shells. For example, Treasury is directed to enact conflict of interest regulations (although the TARP program can start up without these regs in place). The key isn't in having conflict of interest regulations; the key is what those regulations will look like. This type of directive from Congress is so vague as to be meaningless. (The exclusion of the FDIC, which has been the only semi-effective regulator in this mess, from the oversight board is also troubling).

There's a lot more to say about this bill, and I suspect I'll be writing more about it, but bottom line for consumers: nothing for you.

Full post as published by Credit Slips on September 28, 2008 (boomark / email).