The Housing-Asset Relief Program: A Plan for Stabilizing the Housing and Securities Markets

Abstract

As many as six million U.S. homeowners are facing foreclosure during 2009 and beyond. Delinquent residential mortgages are at the heart of the ongoing financial crisis, as they have been packaged into mortgage-related securities originally worth trillions of dollars, but now valued at substantial discounts. I propose to address this crisis by striking at the heart of the problem - by refinancing delinquent mortgages. Approximately $300 billion in TARP or stimulus funds would be used to write down the principal on these mortgages so that new mortgages would meet underwriting guidelines for debt-to-income ratios. Delinquent mortgages would be repaid in the refinancing, eliminating approximately $1.5 trillion in toxic assets from the balance sheets of lenders and the asset pools underlying mortgage-related securities. This proposal is designed to achieve three goals: (1) to enable as many as six million families to avoid eviction and stay in their homes; (2) to recapitalize the banking system; and (3) to detoxify mortgage-related securities by eliminating delinquent mortgages from the underlying pool of assets, thereby avoiding the need for complex “price discovery” plans for pricing these toxic securities. This program deals with a number of practical problems that have dogged other proposals, including how to provide for significant principal reduction, how prevent ruthless defaults by healthy but underwater borrowers, how to deal with second-lien holders, how to deal with mortgages in pools of securitized assets, and how to properly price toxic mortgage-related securities.

Keywords: ABS, banks, CDO, delinquent mortgage, foreclosure, financial crisis, housing, housing crisis, mortgage crisis, MBS, refinancing, subprime, subprime crisis, TARP

JEL Classification: E44, E58, G21, G28, G38