Author: bibi
The Credit Crunch: Where Is It Happening?
Friday, October 3rd, 2008 @ 6:45 am
For many people the credit crisis isn't very real yet. But it is seeping down to Main Street
There are big numbers floating around Washington these days: the $700 billion rescue plan, the $307 billion failure of Washington Mutual bank.
It seems almost beyond belief, then, that a key to unlocking the seized-up credit markets might come at the cost of less than $1,000 a pop to get firms to renegotiate troubled loans. All told, the total government cost might come in around $4 billion—pocket money in comparison to the gargantuan scale of the troubles.
That $1,000—or less!—might be enough to coax a firm that services mortgages to voluntarily renegotiate terms of a single troubled loan. Doing so on a mass scale might keep people in their homes, get mortgage payments flowing, prompt new lending and help ease the housing crisis.
True, it might not work quite so seamlessly. But chaos in financial markets, deadlock in Washington, and credit gridlock on Main Street are not working either.
When Republicans in the House last week killed the $700 billion bailout bill, they rejected a Democratic plan to let bankruptcy judges impose new mortgage terms on lenders and borrowers.
The revised bailout bill only encourages firms that service mortgages to renegotiate delinquent loans. That's like encouraging a raging bull to go easy on the china. It's unlikely to listen.
Here is the chief problem with the voluntary approach: It does not work.
Mortgage service firms, the key players, refuse to participate. Or, worse, those that do often add fees, arrearages and other costs to the principal of the loan. The borrower's monthly mortgage payment actually rises as often as it falls, according to a study of 106,000 securitized subprime loans by Valparaiso University law professor Alan White.
Bankruptcy court is not a viable public policy option either.
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