Well, such has it always been and Our Leaders are the last people to break that chain....Two years ago, William Stout lost his home in Allentown, Pa., to foreclosure when he could no longer make the payments on his $106,000 mortgage. Wells Fargo offered the two-bedroom house for sale on the courthouse steps. No bidders came forward. So Wells Fargo bought it for $1, county records show.
Despite the setback, Mr. Stout was relieved that his debt was wiped clean and he could make a new start. He married and moved in with his wife, Denise.
But on July 9, they received a bill from the Internal Revenue Service for $34,603 in back taxes. The letter explained that the debt canceled by Wells Fargo upon foreclosure was subject to income taxes, as well as penalties and late fees. The couple had a month to challenge the charges.
For those who struggle to pay their bills, who watch their housing payments rise out of reach with their adjustable-rate mortgages, who lose a job or who fall victim to illness, losing one’s home can feel like hitting bottom. But one more financial indignity may await as the fallout from the great housing boom ripples across the United States.
On Friday, the Federal Reserve tried to quell this panic by announcing a surprise cut in the discount rate, the rate at which it lends money to banks. It remains to be seen whether the move will do the trick.
The problem, as many observers have noticed, is that the Fed’s move is largely symbolic. It makes more funds available to depository institutions, a k a old-fashioned banks — but old-fashioned banks aren’t where the crisis is centered. And the Fed doesn’t have any clear way to deal with bank runs on institutions that aren’t called banks.
Now, sometimes symbolic gestures are enough. The Fed’s surprise quarter-point interest rate cut in October 1998, at the height of the crisis caused by the implosion of the hedge fund Long-Term Capital Management, was similarly a case of providing money where it wasn’t needed. Yet it helped restore calm to the markets, by conveying the sense that policy makers were on top of the situation.
Friday’s cut might do the same thing. But if it doesn’t, it’s not clear what comes next.
Whatever happens now, it’s hard to avoid the sense that the growing complexity of our financial system is making it increasingly prone to crises — crises that are beyond the ability of traditional policies to handle. Maybe we’ll make it through this crisis unscathed. But what about the next one, or the one after that?
And more Krugman:
Most of the proposals I've seen for dealing with the problems of subprime borrowers are of the locking-the-barn-door-after-the-horse-is-gone variety: they would curb abusive lending practices - which would have been very useful three years ago - but they wouldn't help much now. What we need at this point is a policy to deal with the consequences of the housing bust.
Consider a borrower who can't meet his or her mortgage payments and is facing foreclosure. In the past, as Gretchen Morgenson recently pointed out in The Times, the bank that made the loan would often have been willing to offer a workout, modifying the loan's terms to make it affordable, because what the borrower was able to pay would be worth more to the bank than its incurring the costs of foreclosure and trying to resell the home. That would have been especially likely in the face of a depressed housing market.
Today, however, the mortgage broker who made the loan is usually, as Ms. Morgenson says, "the first link in a financial merry-go-round." The mortgage was bundled with others and sold to investment banks, who in turn sliced and diced the claims to produce artificial assets that Moody's or Standard & Poor's were willing to classify as AAA. And the result is that there's nobody to deal with.
This looks to me like a clear case for government intervention: there's a serious market failure, and fixing that failure could greatly help thousands, maybe hundreds of thousands, of Americans. The federal government shouldn't be providing bailouts, but it should be helping to arrange workouts.
And we've done this sort of thing before - for third-world countries, not for U.S. citizens. The Latin American debt crisis of the 1980s was brought to an end by so-called Brady deals, in which creditors were corralled into reducing the countries' debt burdens to manageable levels. Both the debtors, who escaped the shadow of default, and the creditors, who got most of their money, benefited.
The mechanics of a domestic version would need a lot of work, from lawyers as well as financial experts. My guess is that it would involve federal agencies buying mortgages - not the securities conjured up from these mortgages, but the original loans - at a steep discount, then renegotiating the terms. But I'm happy to listen to better ideas.
The point, however, is that doing nothing isn't the only alternative to letting the parties who got us into this mess off the hook. Say no to bailouts - but let's help borrowers work things out.
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