We don't have much in the way of detail about the deal that congressional leaders and the White House have reached "in principle" on the bailout plan for Wall Street. We don't even know if it is a done deal for sure -- House Republicans are making a lot of noise about their opposition to any agreement.
But here's what we have been told so far: There is an agreement to divvy out the $700 billion in installments, there will be restrictions on executive compensation, and, according to the Wall Street Journal, "it is also likely to give the government equity warrants in all participating companies." In other words, taxpayers will get a stake in the companies that get rescued from their own bad investments.
That's all well and good -- a vast improvement over the plan as originally presented to Congress by Treasury Secretary Hank Paulson. But what we are not hearing, so far, is any mention of help for homeowners to go along with financial institutions. (At least, insofar as the Paulson plan is concerned. Late in the afternoon, Senate Majority Leader Harry Reid announced a $56.2 billion stimulus package to directly help you and me.)
The one thing we do appear to know for sure is that a change in the bankruptcy laws that would allow judges to modify the terms of mortgage contracts in an effort to slow down foreclosures is dead in the water. The White House is fiercely opposed.
And therein lies an interesting story.
The mortgage modification provision is anathema to the Mortgage Bankers Association, which likes to call such modifications "cramdowns" and claims that giving bankruptcy judges the power to modify contracts will result in higher mortgage loan interest rates -- thus making it harder for Americans to afford homes. Even worse, any such attempt to cut homeowners a break would imperil the sanctity of the holy contract, as former House Republican Dick Armey wrote in an opinion piece for the Wall Street Journal in January:
Not only does this upend more than 100 years of public policy promoting homeownership, it also raises important questions about the sanctity of contract. "The definition of injustice is no other than the not performance of covenant," wrote Thomas Hobbes in "Leviathan." Yet now, it seems that some in Congress want to enshrine breach of contract into the law itself, ostensibly in service of assisting the nation's homeowners. Such a move would not serve homeowners in the least, but it would surely be an injustice.
The proposition that cramdowns would lead to higher interest rates is vigorously disputed by Adam Levitin, a specialist in bankruptcy and commercial law at Georgetown University. At the group blog Credit Slips, Levitin and others have been posting voluminously on the topic of mortgage modifications for months.
But who are the the "mortgage bankers"? Aren't they, as one commentator summarized it, "the industry that originates, re-sells, packages, securitizes, refinances, and eventually forecloses on" mortgage loans? Aren't they exactly the people who were most instrumental in getting America into its current mess? Isn't the real injustice the fact the people who made bad loans and repackaged them into securities that disguised their inherent risk still have the power to shape legislation so as to protect their own interests! The White House, by blocking mortgage modifications, is carrying water for the special interests guilty of the most irresponsibility in the entire credit crunch equation.
In a related note, a few days ago I considered the intriguing suggestion that if the U.S. government bought $700 billion worth of mortgage-backed securities that it would then have the power to modify the terms of the mortgages. In a new paper, Levitin argues against that possibility. Apparently the complexity that ensues from repackaging and slicing and dicing mortgage-backed securities makes it near impossible for the government to buy enough of the toxic mortgage-backed security derivative products to get the two-thirds ownership of a mortgage loan that would convey the power to make modifications. (Levitin's paper, incidentally, is a must read for those interested in a detailed discussion of exactly how mortgages became repackaged into collateralized debt obligations (CDOs) and the likes and what that entails for their ownership.)
So even if we spend $700 billion buying these assets, we still won't actually "own" the underlying loans. Incredible.