I've been meaning to dust off this blog and put together some thoughts about Tarp or not to tarp, and Rick's timely article has prompted me to give Geitner & Barack the keys to solving this intractable problem.
Tarp was the right concept. Many of the assets that have been written down are still performing. But what of those that aren't? The loans that are past due, and need to turn into foreclosures?
Private market enthusiasts would insist the process be allowed to proceed, without regard for people who innocently have been caught up in the whirlwinds of financial dislocation partly enabled by the greed & efficiency of Wall Street.
Simple solution: The government should create a new GSE whose purpose is to buy & hold to term distressed mortgage loans.
Losing proposition? Government foreclosing on innocent homeowners?
Not quite.
I'd have this new GSE adopt a very different foreclosure process.
Once a borrower is past due, and beyond catching up and becoming current, this GSE would essentially foreclose, but not necessarily kick the borrower out.
The next step would depend on the borrower & the potential value of the home. One option would be to allow the borrower to become a renter. Yes, this GSE has now become a real estate owner & management company!
Another option could be to set up a lease to buy type program, restarting the borrower on the road to ownership and perhaps capturing some of their initial investment in their home.
There would be one scenario where this GSE would foreclose and could kick out a former borrower, and that is if the GSE could sell the property for more than is owed on the value of the mortgage that the GSE bought.
What does this do that isn't being down right now?
First, it allows banks to find a new buyer for its loans, one which theoretially could pay closer to par than private institiutions since its time frame is longer and not driven by mark to market.
Banks fixed, check.
Next, by not flooding the market with foreclosures, it slows the drop in real estate values.
Asset values, fixed, check.
Third, personal suffering is minimized, check.
How does the government do this?
Well, for a start, start the GSE with a portion of Tarp funds, or perhaps new funds. Invite private investors to participate, and insure that they will not lose money, but guarantee them a certain rate of return.
This would effectively put the breaks on the negative feedback that has developed. It doesn't reward bad behaviour, and it helps everyone.