Jeralyn posted Hillary Clinton's great speech on our current financial crisis and I think the most important discussion from that speech was Clinton's championing of the HOLC (Home Owners Loan Corporation) model over the RTC (Resolution Trust Corp.) model. I urge you to watch the speech. In the meantime, hear is a nice post from December 2007 from the Consumer Law and Policy blog on these competing choices, highlighting the Center for American Progress proposal.The post:

The Center for American Progress is calling for an updated version of the Homeowners Loan Corporation, the New Deal agency that rescued thousands of Americans from foreclosure, and was the predecessor to FNMA and securitization. In the Depression, most home mortgages were interest-only loans for five years with balloon payments. This required homeowners to refinance frequently and left them at the mercy of lenders. Sound familiar? The situation is not unlike that of homeowners with subprime teaser-rate ARMs, who borrowed on the premise that they could refinance before the payment increase. The HOLC stepped in, buying mortgages from lenders and issuing bonds to finance the purchases. In the process, HOLC created the amortizing, monthly payment, long-term mortgage, the true affordability product of the mortgage industry (and you thought the private market was the source of financial innovation!) In the words of FDR: " to protect home owners from inequitable enforced liquidation, in a time of general distress, is a proper concern of the Government." For more on the history of HOLC, including its role in inventing racial redlining, go here.

The Center's proposal calls for a new HOLC, that would purchase delinquent or at-risk mortgages that cannot be refinanced because they exceed the current property value. The current holder would be offered an amount equal to the property value. Although the holder would lose money, the loss would not be as great as if the holder foreclosed, and had to incur more expenses and delay. The new HOLC would issue bonds, in other words, securitize the purchased loans, and then service them or contract out servicing until they were paid off. Expect to hear more about this proposal in the coming months.

I hope to hear a lot more about it right now. Bailing out Wall Street is not the idea. Bailing out the American economy and our financial system and distressed homeowners should be the goal. This should not be about Morgan Stanley, it should be about the country. HOLC is about the country. An RTC solution would be about Wall Street.

By Big Tent Democrat, speaking for me only

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    Protection for the homeowner (5.00 / 3) (#1)
    by wasabi on Fri Sep 19, 2008 at 12:35:18 PM EST
    If the government can take failed mortgages off the hands of investment houses at a loss for the taxpayer, why can't it help the original homeowner restructure their loan before they have to face foreclosure?  Moral hazard for little people?

    HOLC has already been done (none / 0) (#22)
    by RedSox04 on Fri Sep 19, 2008 at 02:32:04 PM EST
    It's called Hope for Homeowners.

    Also, the current iteration of RTC does not actually resemble RTC, it resembles an expanded version of HOLC.

    I'm as big a Hillary fan as anyone, but her staff really screwed the pooch on this one.  To anyone who's paying attention, Hillary looks out-of-touch and clueless with this proposal.

    HOLC was discussed heavily in Congress earlier this year, which led to the Dodd-Frank Hope for Homeowners Act, which got passed as part of the GSE bill.  Hope for Homeowners is scheduled to start up Oct. 1.

    Also, the "RTC" that's being discussed right now is actually a version of HOLC.  The purpose would be to acquire distressed assets at a discount, then refinance the mortgage holders within them.  The reason you can't simply have an HOLC now is because mortgages are mostly securitized, so you need to acquire enough of the outstanding securities to constitute control of the mortgage.


    CAP (none / 0) (#23)
    by RedSox04 on Fri Sep 19, 2008 at 02:33:29 PM EST
    By the by, CAP worked with Dodd and Frank to develop their proposal.  Hillary is literally 6 months late in announcing her support for HOLC.  The fact that she's unveiling it as a new thing means that someone(s) on her staff screwed up big time.

    Actually, no (none / 0) (#36)
    by tnjen on Sat Sep 20, 2008 at 04:40:45 AM EST
    ...this isn't the first time she's brought it up and it's not an unveiling. What it is, is a show of political strength and leadership in a time of crisis and given that most of our other top tier dems are saying 'we don't have a clue' or variations thereof, it's a desperately needed show of democratic vision. Not many folks pay attention to policies like these until crises like the current one bring them into direct focus.

    Also Hope for Homeowners (none / 0) (#37)
    by tnjen on Sat Sep 20, 2008 at 05:27:44 AM EST
    is a good program but to my understanding it's not HOLC. According to Dodd's Senate site:

    Under the "HOPE for Homeowners Act of 2008," new mortgages that are offered by FHA-approved lenders will refinance abusive loans at a significant discount for homeowners facing difficulty meeting their mortgage payments.

    HOLC, OTOH, actually bought up the mortgages (taking them out of the market and in this case intentionally removing all the bad loans lenders made and are now poisoning themselves with from the market) and issued homeowners new ones whereas Hope for Homeowners doesn't do that but instead helps refinance through approved lenders. A new HOLC would solve both (a) relieving homeowners and (b) removing many of the bad loans from the market (not all of the crisis is housing).


    H for H as currently structured... (none / 0) (#29)
    by santarita on Fri Sep 19, 2008 at 03:18:11 PM EST
    calls for voluntary writedowns.  I would hope that HOLC, RTC or whatever the new entity would be called, would require writedowns to the value of the collateral.  

    I don't think Hillary was claiming that she came up with the idea.  I'd give her a break on that.


    question... (none / 0) (#31)
    by wasabi on Fri Sep 19, 2008 at 03:34:44 PM EST
    If the homeowner were to get a new loan to pay off the old loan before it is in default, then there wouldn't be a bad loan that has been broken up into a million parts that needs taking over by the government.  Wouldn't it just be much simpler to refinance at the front end by the person paying the mortgage, rather than trying to determine who might be needing a bail out in the securitized default loan?

    Well here's the issue (none / 0) (#34)
    by RedSox04 on Fri Sep 19, 2008 at 04:57:03 PM EST
    In every one of these situations, the home value is below the mortgage value ("underwater").  Otherwise, the home owner could simply sell the home and erase their debt.

    So say the home is worth $400,000, while its mortgage is $500,000.  The only way to buy out the mortgage "at the front end" is if you pay $500,000, and then refinance it to the homeowner for $400,000.

    The government could certainly do this, but that would give the mortgage security holders an unfair benefit of $100,000, which it doesn't want to do (both because it would be hugely costly and because most of these mortgage lenders were scumbags, particularly the second lien holders).


    If the mortgage (none / 0) (#38)
    by CRAsucks on Sun Sep 28, 2008 at 12:55:59 PM EST
    is 500K, the homeowner borrowed 500K. That is real money not monopoly money. They need to repay 500K regardless of what the home is worth.

    Oh, it's an enonomics post. (5.00 / 1) (#5)
    by LarryInNYC on Fri Sep 19, 2008 at 01:06:53 PM EST
    HOLC Beats RTC

    for a minute there I thought TalkLeft was becoming a World Wrestling Federation blog.

    No reason we can't do both (none / 0) (#2)
    by oldpro on Fri Sep 19, 2008 at 12:47:43 PM EST
    ...prevention AND cure.

    Not Morgan Stanley (none / 0) (#3)
    by blogtopus on Fri Sep 19, 2008 at 12:47:54 PM EST
    but Stanley Morgan, your next-door neighbor who lost his house.

    Eh, doesn't quite have that same ring, does it?

    I like the way the Dems have been ramping up the smart stuff this past week. Keep it up.

    Ah, Stanley Morgan, all time Tennessee Vol (none / 0) (#6)
    by Teresa on Fri Sep 19, 2008 at 01:12:27 PM EST
    total yards leader and first round draft for the Patriots. :)

    BTD, you have a typo just after "In the meantime".


    Makes sense to me, especially in light (none / 0) (#4)
    by vicndabx on Fri Sep 19, 2008 at 01:02:11 PM EST
    of all these claims that the little guy is really the cause of all these problems. I.e. oh woe is me.....!  If only they were able to pay those mortgages......

    The devil is in the details. (none / 0) (#7)
    by Don in Seattle on Fri Sep 19, 2008 at 01:13:54 PM EST
    The Center's proposal calls for a new HOLC, that would purchase delinquent or at-risk mortgages that cannot be refinanced because they exceed the current property value.

    The trouble with this idea is, in general no single entity owns a delinquent or at-risk mortgage on an underwater property. The mortgages have been packaged together, and then carved up into tranches based on risk. The riskiest of these Collateralized Mortgage Obligations, or CMOs, are basically worthless; while the least risky are perfectly fine.

    Where is the riskiness cutoff, in CMOs, between worthless and perfectly fine? The trouble is, no one knows.

    I don't see that Hillary's proposed revived HOLC would do anything all that different from Obama's proposed revived RTC, or McCain's MFI, or even Paulsen's proposal.

    I agree. (none / 0) (#15)
    by sarcastic unnamed one on Fri Sep 19, 2008 at 01:38:11 PM EST
    In the main, they all have the same idea.

    This should be in the discussions (none / 0) (#8)
    by Manuel on Fri Sep 19, 2008 at 01:18:58 PM EST
    but it doesn't address the whole problem.  The problems is the derivatives that have been created out of the original mortgages and leveraged.  Having finanial institutions fail because the assets and liabilities don't balance won't benefit anyone.

    It would also be good if a new HOLC excluded speculators who drove housing prices up.

    I couldn't find a definition of RTC (none / 0) (#9)
    by coigue on Fri Sep 19, 2008 at 01:23:41 PM EST

    RTC = Resolution Trust Corporation (5.00 / 2) (#17)
    by Don in Seattle on Fri Sep 19, 2008 at 01:40:18 PM EST
    The government entity established in the mid-1980s to deal with the Savings and Loan debacle.

    To me, RTC, MFI, and HOLC are just different people's alphabet-soup names for the same basic idea: a government entity that will buy up and 'quarantine' worthless mortgage-backed securities.

    THe trouble is, unlike the S&L disaster, where at least there was some value to the real estate collateral, and the marketplace of troubled S&Ls was large but finite, in today's crisis the worst of the CMOs are literally worthless. And there is no reason to think that new CMOs and similar vehicles will not be produced ad infinitum, once the government has established itself as the buyer of last resort.


    OK thanks (5.00 / 1) (#19)
    by coigue on Fri Sep 19, 2008 at 02:25:18 PM EST
    next question: what are CMOs?

    CMO = Collateralized Mortgage-backed Obligation (5.00 / 1) (#35)
    by Don in Seattle on Fri Sep 19, 2008 at 05:26:27 PM EST
    A bank agrees to lend money long-term so someone can buy a house; the home-buyer gets the house, and the lender gets an asset in return: the promise to repay the loan, plus interest, over 15 or 30 years or whatever. A mortgage. Simple.

    Except most banks don't want to just hold that mortgage for all those years on their books. So for decades they have been bundling their mortgage assets and reselling them -- to other banks, and to big outfits like Fannie Mae.

    Frequently the bundles of mortgages can be made somewhat more valuable by rearranging them so they have more geographic diversity, or by bundling the safest ones together so that conservative investors can buy only those. Sure, that leaves other pools of only the riskier mortgages, but other investors will be more willing to take them on, with a risk premium (a higher interest rate).

    At some point, some bright person with an MBA came up with an inspiration: why not break up these mortgage pools in different ways? By time period, or by principal vs. interest payments, or (I am sure) any of a dozen other ways I haven't imagined.

    In essence, that's a CMO, at least as I understand it. The key thing to note is that pieces of any individual mortgage can and generally do end up in different CMOs.


    lol, coigue. Thanks for asking your questions (none / 0) (#20)
    by Teresa on Fri Sep 19, 2008 at 02:27:11 PM EST
    so I don't have to!

    You're welcome. (5.00 / 1) (#21)
    by coigue on Fri Sep 19, 2008 at 02:29:16 PM EST
    Always willing to display my ignorance for the good of the masses!

    Don't fret, you're not alone (5.00 / 1) (#27)
    by vicndabx on Fri Sep 19, 2008 at 03:01:39 PM EST
    See here.

    A good resource on the alphabet soup... (none / 0) (#25)
    by santarita on Fri Sep 19, 2008 at 02:55:15 PM EST
    is Investopedia on the web.  

    Oh, great! (none / 0) (#32)
    by coigue on Fri Sep 19, 2008 at 03:39:12 PM EST
    Thanks a lot!

    March 31, 2008 New Yorker Article (5.00 / 1) (#33)
    by santarita on Fri Sep 19, 2008 at 03:53:01 PM EST
    about Merrill Lynch and it's ex-president has some good information in it.

    Simple way (none / 0) (#26)
    by Stellaaa on Fri Sep 19, 2008 at 02:59:50 PM EST
    RTC cleaned up the multi family lending done by S&Ls, when S&Ls were deregulated, they used to only do single family.  So the RTC was looking at the properties, developing a new value, since most were over valued, restructuring the financing and selling the properties to new owners, with new debt.  

    RTC for this crisis will not work, that is why the HOLC works better.  
    (Anything Dodd did I would run away from it, he was always in the pocket of the mortgage guys, yuck)


    Long winded but detailed explanation (none / 0) (#11)
    by vicndabx on Fri Sep 19, 2008 at 01:28:12 PM EST
    can be found in part 1 and part 2.

    thank you, but (none / 0) (#12)
    by coigue on Fri Sep 19, 2008 at 01:29:24 PM EST
    any chance of a cliffnotes version?

    sorry, no such luck..... (none / 0) (#13)
    by vicndabx on Fri Sep 19, 2008 at 01:30:41 PM EST
    i mean we are talking about the financial industry right?

    I believe the Leetspeak version of this is (none / 0) (#14)
    by blogtopus on Fri Sep 19, 2008 at 01:32:26 PM EST

    Heh. I've used it WAY too many times.


    you folks got jokes today..... (none / 0) (#16)
    by vicndabx on Fri Sep 19, 2008 at 01:38:58 PM EST

    ha ha (none / 0) (#18)
    by coigue on Fri Sep 19, 2008 at 02:15:04 PM EST
    Recommendations (none / 0) (#10)
    by WS on Fri Sep 19, 2008 at 01:26:50 PM EST
    Does anyone have any good recommendations for the financial markets.  I'm not all that well versed in this part of policy (like John McCain) and find myself getting lost.  Any books/resources that people recommend?

    One of the problems with cdos already (none / 0) (#24)
    by Christy1947 on Fri Sep 19, 2008 at 02:40:44 PM EST
    is that nobody can figure out who actually owns the mortgage note on which the homeowner is liable, and there have already been cases in some brave bankruptcy and local courts where the servicing company trying to foreclose for the benefit of whoever has been denied the right to do so because it can either not produce the actual promissory note or demonstrate that it belongs in fact to the plaintiff in the foreclosure. HOLC worked when the banks issuing the mortgages continued to hold them, and  sounds good as long as you can figure out who the holder is. That is the horrible problem in unscrambling this because the notes apparently went into pools of some sort (I am not a cdo scholar in this, somebody help who is, please) and what the investors bought was a percentage of either (a) the ownership interest in the note the same way condo holders have a percentage interest, each, in the condo common areas, or (b) a percentage interest in the income stream  generated from the note, based on some estimate of how much that would be if the world were perfect or nearly so. In case (a), all of the percentage OWNERS have to be dealt with, brought into court and their various interests sorted out (what happens if they split a vote on resettling the mortgage at the lower number?). In case (b), it may develop that the investors don't own any actual interest in the note itself, but the problem then comes in figuring out who does (and where it is) and how the financial industry deals with the interest of the (b) option investors.

    Thus, it makes a huge difference if this HOLC plan buys the interests of the (a) investors or the (b) investors. If it buys the (a) interests, it is in fact in position to rework the mortgages as this HOLC structure contemplates. If it is the (b) investors, we've given away a Trillion dollars on this plan without helping Main Street at all.

    As I understand the matter, a lot of the financial chaos we are seeing in the so called mortgage market meltdown, is less from the percentage of mortgagors who are not performing, or the fall in the market value of houses subject to mortgages,  but from the disconnected problems of companies who underwrote credit default guarantees and other bizarre and disconnected instruments/wagers, based on risk estimates found faulty. A wholly separate kind of security beast whose risk and rescue is not legally tied to the fate of the mortgage notes and those who signed them.  

    A Rose is a rose... (none / 0) (#28)
    by santarita on Fri Sep 19, 2008 at 03:02:32 PM EST
    Whether it's called RTC, HOLC or something else, the fundamental principles should be to take steps to effectively deal with the problematic instuments (and the holders of those instruments) and to provide relief to homeowners that merit help (e.g. people who didn't obtain the loan through fraud, people that bought with the intent of flipping and the property should be the homestead, not a vacation house.)

    Unwinding the spaghetti is not impossible - just extremely difficult.


    Precedents ... (none / 0) (#30)
    by santarita on Fri Sep 19, 2008 at 03:21:47 PM EST
    With regard to forced principle reduction, look at Chapter 12 (now sunsetted) and look at some of the Midwestern states that have mandatory mediation on foreclosures.  In the 1980's there was a huge problem with plummeting agricultural land values.  Congress dealt with it (somewhat effectively) then, it can do so again.