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?
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?
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