I’ve been doing a little checking around on Eric Cantor‘s idea to insure everybody’s mortgage, which he and other House Republicans presented Thursday as an alternative to the Hank Paulson’s TARP (for Troubled Asset Retrieval Program) and is now generating some talk, folks in TIME’s Washington bureau tell me, of a blended plan that would combine increased insurance with purchases of mortgage securities.
There’s about $12 trillion in U.S. residential mortgage debt outstanding. At the end of 2007 $591 billion of that was explicitly insured by the federal government, through the Federal Housing Administration and the Veterans Administration, and another $5 trillion was either owned or guaranteed by Fannie Mae and Freddie Mac. Fannie and Freddie have since been nationalized, and the market share of all the government lenders has only grown since then. The government already insures half the mortgage debt out there, Cantor & Co. argue, so why not just insure the rest?
It turns out that people at Treasury and the Fed actually did discuss expanding mortgage insurance when they were tossing around ideas earlier this year for halting the mortgage meltdown, but decided it wouldn’t have nearly the impact on getting markets moving again that buying mortgage securities outright would.
When I emailed Mark Zandi, founder and chief economist of Moody’s Economy.com, a font of mortgage-crisis-fixing ideas and an adviser to the McCain campaign, he responded with that same worry plus some others:
Seems to me it doesn’t address the fundamental problem that there is no market for these securities. How can you write insurance on these securities unless you know the risks you are taking and you can’t know that unless you have a market. Reminds of that pink floyd song. Anyway, this is a much less effective way of addressing the problem and would very likely cost taxpayers more than the tarp. Perhaps most importantly most immediately is that since it is not clear how and if it will work it won’t stabilize financial markets.
When I emailed back to ask which Pink Floyd song, Zandi was unresponsive. Anybody got any ideas?
Then I talked to Lou Pizante, a veteran of the mortgage-securitization business who now runs Mavent, a maker of compliance software for mortgage lenders. He pointed out the only way for the Cantor plan to work actuarily was for every last one of those $6 trillion in mortgage securities to be insured. Otherwise you’d just get the financial institutions with the crappiest loans on their books choosing to participate–which would amount to a giant bailout of the bad guys by taxpayers. So I’m not sure how you could do a blended plan of insurance and purchases, since you’ve got to insure everybody.
Finally, even if you do get every last mortgage in the country covered by insurance, there’s the issue, mentioned in my earlier post, of figuring out how to price it. Too cheap and it’s a bailout, too steep and you make banks’ problems worse. Which is true of the original Paulson plan as well, of course. But that plan is much more upfront about being a bailout.
Update: The “folks in TIME’s Washington bureau” I was citing–one folk, to be precise: Karen–has a post on the political appeal of the Cantor plan. And Barbara has a post on something I thought about mentioning here but didn’t, the fact that the housing bill passed in July contains, among many other things, a big expansion in FHA insurance that goes into effect next week.
Update 2: Commenter Just Curious wonders:
Regarding the Pink Floyd song . . . .
“If you don’t eat your meat, you can’t have any pudding. How can you have any pudding if you don’t eat your meat?”
Another Brick in the Wall (Part 2)
And Mark Zandi responds:
Yes. That’s it.
Update 3: For those benighted souls who don’t read the comments, from Felix Salmon:
Oh. I thought it was that famous Pink Floyd song “writing insurance requires either a long history of past events or, at a minimum, knowledge of present market prices”. I believe it was on all those iPod shuffles that AIG gave out at Manchester United home games.