RE: S&Ls in FDIC Conservatorship
Dear Officers,
Why do the S&Ls offer loan modifications to borrowers only after they are in default? The reality is that once a borrower misses one payment, they will miss several. Contrarily, if a borrower who is current on their payments wants to maintain their good credit, the benefit of a loan modification will KEEP them from defaulting in the first place. The bean counters need to realize that they will prevent greater losses by working with borrowers BEFORE they default on their mortgages.
Nona Green
6128 Chesebro Rd.
Agoura Hills, CA 91301
818 426-2292
p.s. I am about to lose the above property to foreclosure while I wait for my bank to discuss a loan modification. My bank said they wouldn't speak to me about a modification until I was in default - now I am 6 months behind in payments, my credit is destroyed, and the bank has still not responded to my requests.
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Know When To Hold 'Em
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Many private-equity and hedge-fund managers are wonderful people—charitable, kind to small children and animals. But you never want to be on the opposite side of a trade from them. During a boom, you don't want to buy what they're selling. The corollary, of course, is that in a down time, you don't want to be selling what they're buying. Especially on these terms. The FDIC could still be on the hook for $1 billion or more in further losses.
That's why it's odd that the FDIC chose to sell so quickly. The government has the ability to be patient. Its long-term borrowing costs are as low as they've ever been. And consider the experience of the Resolution Trust Corp., the body set up to hold the assets dumped into the government's lap after the savings-and-loan debacle. Rather than try to flip illiquid assets—golf courses, office buildings—quickly at a time of slow economic growth and scarce credit, the RTC took about five or six years to dispose of nearly $460 billion in assets. As David John and J.D. Foster of the Heritage Foundation argue in this paper, the ultimate cost to taxpayers of the bailout—$124 billion—was limited because of the RTC's disposal strategy. "Because the RTC's assets were sold gradually instead of being dumped on the market all at once, the total cost to the taxpayers was significantly lower than early estimates that losses could reach several hundred billion dollars."
One of the problems with our financial system is that it is too pro-cyclical. Think about how Fannie Mae's loan limits are based on average home prices or how the FDIC stops collecting insurance premiums after a run during which there are no bank failures. The system can be pro-cyclical on the downside as well—foreclosures tend to beget distressed sales, which lower home prices, which lead to more foreclosures. By moving to sell banks and financial assets sooner rather than later, the government may be adding to the supply of an asset that nobody wants at exactly the wrong time. Instead of selling now at a low price and remaining on the hook for losses, the FDIC might consider holding out for a higher price later and demanding that it share in the upside. Otherwise, the cleanup risks being a continuation of the trend of socializing risk and privatizing profits.
© 2009
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