The credit crunch and plague of home foreclosures are too large to be ignored, said representatives for a liberal think tank who today detailed plans for a new program that draws from the Depression-era Home Owner’s Loan Corp.
Laura Tyson, a senior fellow for the Washington, D.C.-based Center for American Progress, said she was “struck by the unanimity of views” during the World Economic Forum last month in Switzerland about the need for action to jump-start the U.S. and global economy and inject liquidity into the marketplace.
“The view I heard again and again: Macroeconomic policy of the standard sort is not enough. We need fiscal stimulus,” she said, noting that participants at that economic conference expressed worries about the “serious liquidity crisis under way” that has essentially frozen much of the credit market’s normal function. “Many liken the situation to a downward spiral.”
She added, “We need an … out-of-the-standard-box intervention. Our concern is if we don’t do something now we could actually end up worse off.”
Michael Barr, a senior fellow for the center, during a conference call today and in testimony last week before the U.S. Senate Committee on Banking, Housing and Urban Affairs, outlined the center’s broad proposal to mend market problems that utilize existing institutions.
Dubbed Saving America’s Family Equity, or SAFE, the plan would accelerate the re-pricing of existing mortgage pools at a discount, possibly through an auction or similar platform administered by the Treasury Department.
Participants in the program — which would include including Federal Housing Administration lenders, Ginnie Mae issuers and the government-sponsored entities Fannie Mae and Freddie Mac — would be the ultimate purchasers of these pools of mortgages, and would sort these loans into different categories based on those that must go into foreclosure, those that should be refinanced, and those that can continue on current terms.
Under the proposal, only owner-occupied homes could be refinanced, and participants would arrange for eligible loans to be refinanced into fixed-rate, 30-year mortgages with no prepayment penalties. Mortgages would ultimately be pooled into securities and sold into the secondary markets. Loans originated through SAFE participant channels would be FHA-insured and Ginnie Mae guaranteed under the program, and Fannie Mae and Freddie Mac would securitize other SAFE loans, according to a description of the program in congressional testimony by Barr.
“Investors would take a hit” with the discounting of the pools of mortgages, he said, in exchange for another investment “that is fairly priced and freely marketable.” One possibility is to swap Treasury options at a steep discount for a mortgage loan, he said.
“Our program is not a bailout,” he said, and he acknowledged that there are many details to be worked out with the proposal. But it is intended to stop the “contagion” of the credit market troubles from continuing to drag down the economy. “If we fail to take action now it will necessitate much more intervention as action later.”
In testimony, Barr referenced the Home Owners’ Loan Corp., which was born out of foreclosure problems during the days of the Great Depression and was authorized to issue new loans to replace the liens of homeowners in default of their existing loans. The center’s plan, he stated, is modeled in part after that entity, which actively issued loans from 1933-36 and later serviced those loans and disposed of those properties acquired through foreclosure.
David Abromowitz, another senior fellow for the center, said that the large-scale foreclosure problem could be addressed through federal block grant money that is administered with state and local control. He suggested that billions of dollars in grant money could be used to buy up foreclosure properties and to “get them in the hands of good, stable homeowners.”
He said it could be far more costly to wait for the market to recover on its own, as the damage to neighborhoods and communities could be very extensive.