SocraticGadfly: Subprime solution: Extend and expand Section 8?

February 05, 2008

Subprime solution: Extend and expand Section 8?

That’s essentially the solution of Richard Bove, an analyst at Punk Ziegel & Co:
Bove proposes refinancing subprime borrowers with government-backed loans at an interest rate of 1 percent. …

Under the plan, the Federal Housing Administration would guarantee the loans and the banks would pay off all outstanding housing debt on the home. The new loan would be bought by the Government National Mortgage Association, or Ginnie Mae. Ginnie Mae would then repackage the loans into a bond paying a market yield. Bove throws out 6 percent as a possibility.

The difference between the actual 1 percent payout on the loans and the 6 percent paid by the new securities would be covered by the government. Taxpayers, in turn, would pay about $150 billion as part of the bailout.

“The cost may sound high, but it is not,” Bove wrote in an argument for the plan. “Compare it to the cost of rebuilding New Orleans below sea level or the cost of the Middle Eastern Wars. It is not high relative to these expenditures. The result is far different, however.” …

Like any reasonable proposal out there, Bove’s isn't going to save everyone. He proposes that refis are offered only to homeowners whose loan payments will be at most 30 percent of their income. He also wants borrowers to live in the home for a minimum of five years.

If the plan sounds familiar, it’s because Bove is simply trying to extend the government's Section 8 housing program to people who would otherwise not qualify.

I’m OK with the general idea, but not that big a spread on the interest rates. I think banks and other mortgage institutions ought to eat more of the losses they created — they need to suffer as a reminder.

Using Bove’s analogy, Katrina was an “act of God”; the subprime crisis, not — maybe an “act of Greenspan,” but that’s a whole nother story.

And, the true progressive in me says fines, garnishing excessive financial institution CEO pay or similar ideas would be a better finance mechanism than straight-up taxpayer dollars.

I’m also upset that among the myriad of subprime fix ideas, even the progressive Center for American Progress is not, apparently, proposing “linkage” of a subprime fix/bailout to new regulatory legislation.

No comments: