Spring Conference Review - reomac

Session III – continued from page 34
Peter Monroe also noted that local liens
slapped on properties destroy incentives
to purchase vacant homes.
Judge Goldberg, a California bankruptcy
judge and an attendee of the discussion,
offered that it is not helpful to make
borrowers a slave to loans and to keep
them in homes that they cannot afford.
Equity participation sharing was also
discussed in return for lowering interest
rates and payments for homeowners during
a workout.
Chris Thornberg next discussed that since
owners of loans are diverse; it is not easy
to renegotiate defaulted loans. Pension
funds in Norway and hedge funds are
among owners of loan pools. He noted
that homeowners sometimes purchase an
identical home down the block and hand
the first owned home back to the bank to
force the bank to deal with it. Flushing
the system is what he suggested is the
solution.
Peter Monroe next stated that propping up
banks that have become too big to fail is
only postponing the inevitable. This policy
did not work in Japan and stagnation ensued.
He also expects commercial defaults to
triple or quadruple in the near future.
John Vella, next stated that defaulting home
owners might participate in short sales.
Energizing local real estate brokers to help
is another solution to the problem. Chris
Thornberg disagreed and stated that banks
are not part of the solution but are in fact
the problem as they have not negotiated
properly. Monroe disagreed and stated
that vacant properties are causing greater
problems and banks are in fact part of the
solution. Vella reminded the audience that
92% of loans are performing and accepting
the “Mulligan” rule would create a moral
hazard. Thornberg thought the real moral
hazard was allowing Richad Fuld of Lehman
Brothers to walk away with 400 million
dollars. The only solution according to
Thornberg is to flush the system and tighten
underwriting standard for new borrowers.
Borrowers should be required to invest at
least 5%-10% as a down payment and prove
creditworthiness.
Monroe stated that propping up institutions
results in propping up and rewarding the
worst banks. This is a moral hazard and
penalizes the whole system. Thornberg
agreed and the country should not coddle
banks, instead the worst banks should be
allowed to fail. Stress test that are being
utilized are “pure crap” according to
Thornberg, and it is only diverting attention
from the bank’s failure. The problem is at
the top and legislators cannot allow the
bottom to fix. Instead, government must
force the banks to face reality. Banks should
be allowed to fail, but they should be kept
operating. Bankruptcy does not wipe out
jobs, it just rejiggers equity ownership.
Senator Calderon felt that since banks
created problems they should help pull
borrowers out.
John Vella suggested PPIP will be successful
since it will allow bad assets into the hands
of asset managers who will work out the
problems. On the other hand, Chris
Thornberg, felt that taxpayers should be
told the truth and the system in place is
a big sham with no hold of taxpayers ever
seeing the money repaid after given to the
failing banks. Forcing write downs on
principal abrogates constitutional property
rights and tosses out a long history of legal
precedents.
Rocky Rushing stressed that human factor
must be considered. Disagreeing with
Chris Thornberg, he stated that you can’t
just flush the system. Tossing folks out of
homes with banks wiping out the family
dream are issues that need to be considered.
Economics cannot be taken in a vacuum.
Bailing out blue bloods at banks but not blue
collar workers in Detroit is not fair.
Chris Thornberg disagreed and said
neither the blue bloods at banks nor blue
collar workers should be bailed out. There
are 8000 banks in the United States and
regulatory nightmare is being created.
Allowing bank CEOs to take in big risks,
hide it, make extraordinary profits and then
walk away to leave the problems created for
the government to correct is certainly one
result that cannot be permitted, he said.
It is clear, our country’s problems are quite
complex and easy solutions are not possible.
In the meantime debate stirs thought.
REOMAC ® update tm Ma y / Jun e 2009 35