James Surowiecki, financial writer for The New Yorker, is usually pretty good, but he must be playing dumb here.
What, exactly, is wrong with the "Hope for Homeowners" program that Congress enacted this summer? The program was intended to allow homeowners to trade out of their adjustable-rate mortgages into thirty-year fixed-loan, F.H.A.-insured mortgages at what were supposed to be lower rates. The Congressional Budget Office's initial projections were that almost half a million homeowners would use the plan. But in its first two weeks of existence--as with everything else, the plan took inordinately long to put in place, and didn't go into effect until October 1st--only forty-two people applied for help. And the government's now saying they think only thirteen thousand people are going to use the program in the first year.
Some of the shortfall appears to be due to borrowers waiting to see if the government will come up with a better plan, but the biggest problem appears to be that lenders aren't all that willing to take part in the program...
I'm not sure I understand the calculations that underlie the original lenders' hostility to the plan: isn't a guaranteed return of seventy to eighty per cent of the original loan better than the ever-increasing risk that you'll have to foreclose on a sizeable percentage of these properties? But what I really don't understand is why the C.B.O. thought four hundred thousand homeowners would end up using this program, when the real number appears to be less than a tenth of that. Didn't anybody talk to lenders before they wrote the bill and came up with this plan?
Is the following scenario that hard to imagine?
"Gee of course, Mr. Bernanke, we'll cooperate with whatever plan you'll come up with! Write down the debt? Oh, of course, we'd love to do that! I'm sure, oh golly, hundreds of thousands of borrowers will take advantage of such a generous program. We will market it as vigorously as we can and we certainly will not sit on our hands and wait for you to overreact to the next market hiccup and buy all of this junk from us."
How can Surowiecki suggest that borrowers are holding out for something better and not think the banks are, too? Is Joe the Plumber seriously more likely to play the government than, oh, say, Fannie Mae?
And to the extent the lenders are going to participate in this program, isn't it rational for them to hold off as long as humanly possible before offering to refinance any individual homeowner's loan? Let's say you're holding the $300,000 mortgage on this one bedroom shack in Compton, CA. The most rational thing for you to do would be to go on collecting that $3,000 mortgage check every month as long as you can. Say the buyer shows signs of stress by missing a payment, or deaulting on one of the credit cards he holds -- then you swoop in and try to renegotiate the terms.
One major problem with the government interventions thus far is that they have tended to assume a level of good faith by institutions that have committed fraud and negligence at every step of the process.
Speaking of which, I hope everyody reads Michael Lewis' Portfolio piece that tells the history of the subprime fiasco from the perspective of some guys who saw it coming.