Saving the housing market is a Catch-22. The phrase defines a no-win situation; someone is going to have to pay more for the distressed mortgages than the homes are currently worth.
The book, "Catch-22," which I have referred to in an earlier column, is one of my favorites because it is so much like life - comic, tragic and frustrating. It defines the predicament of the characters - they try to live their way through waning days of World War II while the enemy, the bureaucracy and even their fellow flyers do their best to get them killed one way or another. They want to survive and have fun but there is always some catch - a reason they cannot do what they want. And that's always a Catch-22.
One of the characters is Milo Minderbinder, a lieutenant dedicated to making a buck and only making a buck. He sees the war as a business opportunity so he starts his own company dedicated to making him rich. Milo wheels, deals, trades and steals. He even arranges to have his own based bombed for a price; it's just another contract to Milo.
Milo worries that the other soldiers might rebel if they thought he was being selfish, so he uses two public relations strategies to convince them they are all benefitting from his schemes. He names his operation "M & M Enterprises" even though only he is M&M and he promotes the theme "everyone has a share" when, if fact, he has all the good stuff and the others are left with only worthless pieces of paper.
Based on the latest proposals for a government bailout of the toxic mortgage industry floating around Washington, someone in government must be a fan of Catch-22 and an admirer of Milo Minderbinder. They want to put together a government-run bank that will own nothing but bad mortgages and everyone will own a share. I'd call it the United States Bank of Insolvency, (USBI) for short.
USBI's first problem will be determining what to pay for distressed mortgages. No one can really put a value on a home that can't sell. If the homes were valued at the market price they would be worth almost nothing under the present conditions. On that front, at least, I have a proposal.
Unless you believe that people do not need somewhere to live, it's obvious to me that, even in a depressed market, homes are really worth at least their replacement value. Considering what it costs to put a shovel in the ground around here, that's quite a bit.
The second problem for USBI is who will benefit from this massive bailout? When USBI agrees to handle the toxic waste of worthless mortgages how much relief will go to the banks and how much will go directly to the homeowners? If USBI takes bank stocks in trade for part of these funds, shouldn't they also take part ownership in the homes? If they do, they will have a reasonable chance of being repaid by responsible homeowners.
If they do not, this will be a straight wealth transfer from those who were prudent and careful to those who either took a liar's mortgage or drained cash from their homes via refinancing.
If I were an investor with a choice I wouldn't touch a share of the stock in the United States Bank of Insolvency with a 10-foot poll. But there's a catch, a Catch-22.
This Catch-22 is that if this goes through, the government is going to use our tax money for the bailout and everyone will own a share whether they like it or not. If this is not done very carefully, we are all going to be shareholders in the equivalent of M&M Enterprises with nothing but worthless paper to show for it.
Marty Richman Got a question or a comment? Send us an email.
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