Joe Nocera: The Way Out is to Help the Homeowners

NYTimes business columnist Joe Nocera was a finalist for the Pulitzer Prize in commentary last year. His latest book, Good Guys and Bad Guys: Behind the Scenes with the Saints and Scoundrels of American Business (and Everything in Between), is a collection of his business writing.

Nocera believes we can’t solve the financial crisis without addressing the problem that people have sub-prime mortgages that are going to go delinquent or are already facing foreclosure. A guest on Bill Moyers’ Journal last week, he spoke with Deborah Amos:

JOE NOCERA: You cannot solve the financial crisis if you don’t solve the problem at the root, which is on Main Street in people’s homes where they either have sub prime mortgages that are going to reset in ways that will make them unable to pay their mortgage, or they’re already facing foreclosure…. if you don’t do something for homeowners, not only will it hurt the economy, it’ll hurt neighborhoods. It’ll hurt the next door neighbor. And by the way, it’ll go all the way up the chain of Wall Street and you’ll start to see the write offs all over again and the same problems all over again.

DEBORAH AMOS: The counter-argument has been about moral hazard. That if you bail out, bail out homeowners, there’ll be more people who will say, “I need help.”

JOE NOCERA: And there’s more than a little truth to that. And the moral hazard is a real argument. And it has driven a lot of the thinking in Treasury about what to do about homeowners. It’s like if you give people incentive to foreclose, more people will decide, “Hey, I’m about to foreclose.” So my problem with it really is that if you’re going to say that about homeowners, why don’t say the same thing about financial institutions? Why doesn’t moral hazard work for them as well? And, you know, the government has bent over backwards to give money to financial institutions whether they need it or not. And they just don’t seem to have the same set of standards.

He’s a fan of FDIC head Sheila Bair, a political appointee who broke with the administration:

JOE NOCERA: Well, she has been in this position where she has, the FDIC took over a bank in California, IndyMac, and they have used it as a petri dish to experiment with mortgage modifications to see what can be done, what can’t be done, how many can we do. Now, the program is still in its beginning stages. There are 60,000 mortgages at IndyMac. And I think they’ve only modified 3,000 or 4,000. But she does view this as a way to do major modifications. And the idea is, you know, you get it down to 31 percent of their income, however you have to do it. Income, interest rate readjustments, even some principle readjustments. You broaden the length of the loan. You make them fixed rates. There’s a lot of things she’s doing. …

[These things] absolutely do work. Now, what she wants to do on the federal level is cut a deal with banks that basically says if you modify mortgages so you take a bit of a hit and you do same thing we’re doing at IndyMac, we will guarantee that you won’t lose any more money on those deals. In other words, if the person re-defaults after you do a modification, the government will guarantee to cover the loss on the re-default. The estimate for that at the moment is about $40 billion. She has been negotiating with the White House for well over a month on this and the Treasury Department. And they basically think it’s too much money and they don’t want to spend it. And they also think her criteria is too broad, and they want to narrow it. So she finally, in disgust really, just posted her plan on the FDIC website and basically said, “Here, America, is what I want to do and they won’t let me do it.” She is completely broken with the administration.

In an editorial last month the NYTimes endorses the idea, “the Treasury would do well by the American public by going where Ms. Bair and the F.D.I.C. are leading.”