A rescue plan for the subprime mortgage blow-up
Sir, Desmond Lachman in “Housing bubble burst into American elections”, April 18, paints a very sombre picture that is just made much worse by the possibility that the first order of action, in this fire, will be to apportion the blame. We all must know that any plan that wants to have a chance to contain this disaster, needs to accept that its goals have just as much to do with improving borrowing, lending, packaging, rating, investing and regulating histories. No party is without blame.
1. If companies can have a Chapter 11 time-out, there should be no reason why the subprime mortgage sector should be forced to panic.
2. There is but one way to minimize the overall costs to borrowers, lenders, investors and society, which is to find the mechanisms to turn these uncollectible subprime loans into collectible prime loans and then have the costs of doing so shared by the parties, with a final settlement postponed in time, way down the road. For instance, if the borrower can only service a normal low fixed rate loan at a level equivalent to seventy cents per dollar on the actual dollar owed, then the loan has to be written write down to 70% plus a reasonable loss recovery clause applicable much later, when the real value of the houses support it.
3. In order to implement the program there will be a need for a fund that would repurchase mortgages through an auction system at the lowest cents per present value of dollar tended.
4. Those lenders, or packagers, or investors who would wish to implement a similar program on their own, or proceed directly with their foreclosures after the time-out, are free to do so, but need then to accept direct responsibility for any wrongful behaviour that could have been present during the original signing of the mortgages.
1. If companies can have a Chapter 11 time-out, there should be no reason why the subprime mortgage sector should be forced to panic.
2. There is but one way to minimize the overall costs to borrowers, lenders, investors and society, which is to find the mechanisms to turn these uncollectible subprime loans into collectible prime loans and then have the costs of doing so shared by the parties, with a final settlement postponed in time, way down the road. For instance, if the borrower can only service a normal low fixed rate loan at a level equivalent to seventy cents per dollar on the actual dollar owed, then the loan has to be written write down to 70% plus a reasonable loss recovery clause applicable much later, when the real value of the houses support it.
3. In order to implement the program there will be a need for a fund that would repurchase mortgages through an auction system at the lowest cents per present value of dollar tended.
4. Those lenders, or packagers, or investors who would wish to implement a similar program on their own, or proceed directly with their foreclosures after the time-out, are free to do so, but need then to accept direct responsibility for any wrongful behaviour that could have been present during the original signing of the mortgages.
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