Housing News

How to Approach the Bank Rescue

Here are reactions on the new bailout plan.

Readers are hooked in a debate whether Obama’s bank bailout plans will work out or not. A week ago, reports have come out regarding investors demanding the government to provide a guarantee to the proposed sell out of toxic mortgages. It was however a risky move that they are somehow forced to take. After Treasury Secretary Timothy Geithner’s speech last week on the government’s assured backing of these assets, a number of criticisms have come up. Here, Dino Kos of Portales Partners stresses the Secretary’s rejection of banks’ nationalization.

Another opinion was written by financial analyst Ari J. Officer of a href=”http://www.time.com/time/business/article/0,8599,1879270,00.html”>”Time”. He suggests, “(T)here is a better, cheaper, less risky, more direct way to improve banks’ balance sheets and restore confidence. Here’s how: Reduce the outstanding principal on every single mortgage to, say, 70% of the original value. Yes, you read that correctly: lower every American homeowner’s mortgage debt by a fixed percentage.”

Kos’ speaks in behalf of the distressed homeowners and the inquiring public. We need more details of Geithner’s announcement. The Secretary should be doing the rounds in the media. On the other hand, Officer’s idea is a bit ambitious. At 70 percent, the government can certainly not afford to slash the outstanding principal. In fact, it could dig its own grave right from the beginning of the TALF program since adjustable rate mortgage holders who cannot afford to refinance their loans account for more than 5 million holders. Furthermore, it could influence other borrowers in good standing to fall into moral hazard. With such huge reduction of payment, it would put lenders at a dangerous spot in the long-run. Officer’s idea could involve a lower percentage though to make it plausible.

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