It appears that the financial markets are taking their cues from the President as opposed to the Treasury Secretary. This week we saw the major equity markets tumble as the Treasury’s half-baked Bailout II Plan was partially unveiled. But most importantly, the markets started to respond– first yesterday- after the President began to dust off the history books and talked about some kind of mortgage forbearance program and an allocation of $50-$100 billion from the Bailout. Today, interestingly enough, Citi Bank and JP Morgan Chase agreed to follow suit and hold off on filing new foreclosures for three weeks until the President announces his new program.
So what can we expect in such a program? If we let history be our guide, during the Depression the government guaranteed a number of home loans that were under water through the Home Owners’ Loan Corporation (HOLC). Its purpose was to refinance homes to prevent foreclosure. The HOLC granted long-term mortgages to over a million people facing the loss of their homes. HOLC was only applicable to owner occupied homes and additionally assisted mortgage lenders by refinancing problematic loans and increasing the institutions liquidity. When the HOLC ended its operations and liquidated assets in 1951, HOLC turned a small profit. Over a period of 12 years or so, the government recouped about 80% of the money they guaranteed.
So how will the Obama administration implement such a program? Here are my thoughts–in brief.
Today I would run the program as follows:
- Owner occupied homes only.
