As current Treasury Secretary Henry M. Paulson Jr. continues pitching his estimated $700 billion bailout plan to Congress and other stakeholders, former Treasury Secretary Lawrence Summers warns that any solution to the problem will be incomplete unless it addresses shrinking home values and mounting mortgage debts.
With homes rapidly losing value, many homeowners are faced with mortgage payments larger than what their homes are worth. As such, “we could be doing substantially more” to help distressed homeowners, said Summers, who was on a panel hosted by The Hamilton Project, an economic policy research project of The Brookings Institution, and held Tuesday at the National Press Club in Washington, D.C.
Federal Deposit Insurance Corp. Chairwoman Sheila Bair, also on the panel, said her agency is getting the opportunity to do that through its takeover of IndyMac Federal Bank. Instead of worrying about whether a customer owed more than their mortgage was worth, the FDIC has focused on the affordability of that mortgage payment.
“We won’t see the light at the end of the tunnel until home prices stabilize,” Bair said. “That means you need to get these loans restructured.”
But Summers countered that fixing mortgages won’t heal Wall Street. He insisted that the mass rush for liquidity and the large amount of securitized loans with no value must be addressed. “You won’t get to a safe place unless you address all of them,” he added.
Summers, Bair, and the third panelist, Eton Park Capital Management CEO Eric Mindich, think the bailout is necessary, though Summers and Mindich are concerned that the government may overpay pay for the troubled loans to fix everything “in one go.” Mindich also wondered if it would turn into an “opaque” subsidy to the banking industry.
A government infusion of capital into the market will have one other adverse affect, Mindich added. It will do nothing to unlock the capital markets. He suggested pulling the private market and its due diligence into the process by offering them a stake—possibly 10 percent—in the assets the government will purchase. He suggested the government could also offer high-interest rate loans for private firms to buy troubled mortgages.