Help the subprime´s go prime

Sir for a holder of a house mortgage the worth of it depends on the credit-worthiness of the debtor. For instance a thousand dollars paid each month servicing a mortgage during 15 years, when discounted at 11 percent per year, because the borrower is deemed “risky”, is worth only 88.000 dollars today, but exactly the same monthly one thousand dollars when discounted at only 6 percent because the borrower is deemed creditworthy, is worth 118.500…35 percent more! Herein lies one of the real problems of the subprime debtors… not only do they have less money but the little money they have is also worth less.

Lawrence Summers in “America needs a way to stem foreclosures”, February 25 speaks about the need for the creditor, when they “accept a write-down in the value to their claims, to retain an interest in the future appreciation if the homes on which they have mortgages”. This might be correct from an economist’s long term point of view but unfortunately bears little or no relevance to our mark-to-market accounting rules that do not look at future house values. Instead, was the creditor, when accepting a write-down, to obtain an additional guarantee that improves the rating of the mortgage, then the creditor could immediately cash in this on his balance sheet.

It is amazing how little money up-front can go a long way solving long term problems. If you want to go down memory lane, a similar principle was used behind the “Brady bonds” issued in the 80s to help developing countries manage their debts. Is it not time for some similar creativity to help your own citizens?

What discount rate should be applied to analyze the benefits of the unborn?

Sir, Nicholas Stern, in order to tell us that the “Gains from greenhouse action outweigh the costs” (November 8) had also to argue that “we cannot avoid the ethical issues involved in allocations between generations” so that he could be allowed to use the low discount factors that validates his cost-benefit analysis. When so coincidentally FT´s front page that very same day carried the story on “Big Four firms in call to switch to real-time reporting” this really helps to illustrate the conflicts between the short terms results we all expect and the long term actions the world needs.

Recently I read a small publication titled “Faiths and the environment” that spoke about some pioneering work supported by the World Bank aimed to furthering whatever links could exist between those two and since given that religious groups are in fact one of the very few driving forces behind helping us to take a longer perspective on issues they could by prioritizing more the environment really assist us in lowering the high discount rates that prevail out there.

The second thought picks up on what Stern says about “the needs of future generations should be represented in decision-making” which reminds us of the urgent need to get some more real representation of the young and perhaps even the unborn into our democracies… and I mean before they are completely taken over by the baby boomers.