A ‘Moral Hazard’ for a Housing Bailout: Sorting the Victims From Those Who Volunteered

Posted by Kendall Harmon

Over the last two decades, few industries have lobbied more ferociously or effectively than banks to get the government out of its business and to obtain freer rein for “financial innovation.”

But as losses from bad mortgages and mortgage-backed securities climb past $200 billion, talk among banking executives for an epic government rescue plan is suddenly coming into fashion.

A confidential proposal that Bank of America circulated to members of Congress this month provides a stunning glimpse of how quickly the industry has reversed its laissez-faire disdain for second-guessing by the government — now that it is in trouble.

The proposal warns that up to $739 billion in mortgages are at “moderate to high risk” of defaulting over the next five years and that millions of families could lose their homes.

To prevent that, Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates.

“We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market,” the financial institution noted.

Read it all.

Filed under: * Economics, Politics • Economy • Housing/Real Estate Market

6 Comments
Posted February 23, 2008 at 4:07 pm [Printer Friendly] [Print w/ comments]



1. Sarah1 wrote:

RE: “To prevent that, Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates.”

Oh, I so hope that the government does NOT offer this.

Banks made some dreadful dreadful loan decisions.  Now—as with the thousands of consumers who made bad decisions for themselves—banks will bear the consequences for their very poor decisions.

That is a good thing.

A bailout merely encourages banks to do it all again the next time we have low interest rates.

February 23, 5:19 pm | [comment link]
2. Philip Snyder wrote:

The victims are not the banks - who pushed these loans on people.  The victims are not the borrowers who purchased more home than they could afford.  The vicitms are those who pay their bills on time and have seen a chunk of their investment gains evaporate because banks got greedy and individuals got greedy.

YBIC,
Phil Snyder

February 23, 9:44 pm | [comment link]
3. Marie Blocher wrote:

Don’t forget the real estate agents pushing naive people to buy more house than they needed or could afford so the agents commission would be larger.

Marie at Rez

February 23, 11:45 pm | [comment link]
4. Irenaeus wrote:

I strongly oppose any government bailout of banks.

But I’d note for the record that many of these loans were originated by mortgage bankers and mortgage brokers, not by the commercial banks who now own the mortgages or mortgage-backed securities at issue here. The commercial banks are grown-ups who chose to invest in this stuff. They shouldn’t get a government bailout. But they shouldn’t necessarily be blamed for originating predatory loans in the first place.

February 24, 1:20 am | [comment link]
5. Dave B wrote:

I have noted in my brief life that this sort of stuff happens on a reoccurring basis.  The housing market was hot and banks were in a lending mood.  A friend bought more house than he could afford and needed.  The market collapsed and he had to walk away from the house, no, not 2007 but 1984.  The Savings and Loan mess, the tech stock collapse. About every eight to ten years we go throught an economic corrrection. Greed and desire have created an economic storm of bibilical perportions this time.  There is an author is Georgia named Ferrel Sams who states in one of his books where his father is talking about him ” I just can’t think of enought things to tell him not to do”!  That is the way I feel about investors, bankers and developers etc.

February 24, 9:48 am | [comment link]
6. William Rolf wrote:

When given the option, business prefers to privatize profit and socialize loss. ‘Twas ever thus.

February 24, 10:48 pm | [comment link]
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