Mike the Mad Biologist

We Can Afford Mortgage Cramdown

So can the banks. A key impediments to economic recovery is underwater mortgages: people repay housing loans for more than the underlying property is worth. Many Dirty Fucking Hippies sane people have recommended that banks be forced to ‘cramdown’ these mortgages*. This would make the banks’ books more transparent (and probably cause some ‘zombie’ banks to go under), but it would also mean that many households would be spending some of the money that used to go to the overpriced mortgage.

Banks, as you might expect, don’t like cramdown. They claim it’s too expensive, and they simply can’t afford to lower all those mortgages (remember that, to a bank, your debt is its asset). A recent report puts the lie to the banks’ complaints (italics mine):

The 73 billion dollars it would cost to write down those mortgages would be only half what the top 6 banks alone are getting ready to write in bonuses and compensation for 2010. If forced to write down these mortgages, the banks will scream bloody murder, even claiming it would endanger them and the entire economy. But all they have to do is cut their bonus and compensation packages, the vast majority of which go to top executives and traders, by 50%. Given all the cash these banks are sitting on, all the profits made and bonuses distributed in recent years, I have no doubt they can afford the hit. The ironic thing is that if they wrote down these mortgages, they would be getting monthly mortgage checks from all these homeowners, plus avoid the costs of all those foreclosure proceedings, but they don’t want to write down the property because of their own phony accounting that claims the properties are worth far more than they actually are.

We need banks and bankers, but we don’t need these banks and these bankers.

One other thing: the $73 billion in reduced mortgage payments would create an estimated 1.8 million jobs, or lower U3 unemployment by about 1.5%.

Which means this will never happen.

*Most cramdown plans, which lower the mortgage to current market value (‘mark to market’) involve either the bank eating the entire loss, or (the one I prefer), the bank eats half, the government eats the other half, on the condition that if the house is sold for a profit, the government gets fifty percent of the profit (this would be voluntary).

Comments

  1. #1 Kermit
    December 20, 2010

    This is a win-win situation for everybody, even the banks (considering the only real alternatives). Quite reasonable. Therefore, of course, it will never happen.

  2. #2 Tony P
    December 20, 2010

    I not that Bank of America is furiously lobbying against cramdowns here in RI.

    The thing that amazes me is that it’s so transparent now what with the Sec. of State’s Lobbytracker application.

    Anytime someone complains about the unions I point them to LobbyTracker and give them some examples of the legislation spawned by those lobbyists.

  3. #3 Hal Minot
    December 21, 2010

    Treasury had that option on the table before HAMP was a twinkle in someones eye.
    They chose HAMP and the results speak for themselves.

  4. #5 Dunc
    December 21, 2010

    But all they have to do is cut their bonus and compensation packages

    Like that’s going to happen. They’d rather go broke.

  5. #6 Roman
    December 21, 2010

    The 73 billion dollars it would cost to write down those mortgages would be only half what the top 6 banks alone are getting ready to write in bonuses and compensation for 2010

    This is not true. The truth is more modest:

    With third-quarter figures from JP Morgan expected to begin a bumper profit reporting season today, a study of more than three dozen banks, hedge funds, money-management and securities firms estimates they will pay $144bn (£90bn) in salary and benefits this year, a 4% increase on 2009.

    So it’s not “top 6 banks” but more than 18 financial institutions.

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