President Obama and the Real Estate Industry: A Quid Pro Quo Proposal

President Obama and the American real estate industry have a mutual interest in turning off the twin economic engines that are driving the nation’s financial downturn—the fall in housing prices and the credit crunch/impending collapse of major banks. 

 Most experts agree that the way to halt the slide in housing prices is to minimize foreclosures by keeping people in their homes with delinquent mortgages that have been restructured.  A huge obstacle to the restructuring of home mortgages is the inability of bankruptcy judges to alter home mortgage terms.  Ironically, when most debtors appear before bankruptcy judges, their largest economic liability is almost always their home mortgage—the one payment they cannot escape. 

The real estate industry, with the notable recent exception of Citigroup, has strongly opposed the restructuring of home mortgages, or “cram downs,” as they are derisively termed, needed to keep delinquent home owners in their homes and out of foreclosure.  However, the economic news of this week should curb the industry’s opposition to home mortgage restructuring:  with blue chip firms like Microsoft and Intel laying off thousands of workers, it is now clear that present and coming corporate layoffs inevitably will cause more and more households to stop making their monthly mortgage payments and file for Chapter 11 bankruptcy, aggravating further the foreclosure crisis that keeps the housing prices falling and prevents economic recovery.  

Of course, if the real estate industry is to give up its opposition to bankruptcy cram downs, it would rather get something than nothing.  So, what might the real estate industry want in exchange for withdrawing its opposition to bankruptcy home mortgage restructuring?  A possible answer is Fed Chairman Ben Bernanke’s idea this week of federal government creation of a “Bad Bank,” i.e., a new financial institution into which troubled banks would deposit their “toxic assets,” i.e., the discredited “mortgage-backed securities” investments now clogging some banks’ balance sheets and arousing such fear of non-payment that banks will not lend even to each other, much less to other would-be borrowers, even after distribution of the first $350 billion of the TARP program.  Unlike the original Paulson plan to purchase these toxic assets at above-market prices, the Bad Bank program would involve a bargain basement purchase by the federal government of all banks’ toxic assets in conjunction with a recapitalization of the participating banks, even to the tune of ten to twenty percent of GDP, a price tag that major economists say is high but doable, provided the government acts carefully.  Simon Johnson, former chief economist of the International Monetary Fund, describes the Bad Bank approach as “the biggest financial sanitation project ever.”  And the benefit to the real estate industry of a Bad Bank?  A process leading within several years to the restoration of the American financial industry and the resumption of available financing for real estate deals. 

President Obama has signaled his desire for a comprehensive, bi-partisan approach to the economic problems besetting the nation, one necessarily built upon many compromises.  An offer by the real estate industry now to withdraw its opposition to home mortgage restructuring by bankruptcy judges—a concession eagerly sought by the new president and his party—linked to support for a federal program to purge the toxic assets of banks (an approach which the federal government has shied away from since the early days of TARP) would constitute just such a compromise and position our industry in a progressive light in the eyes of Congress and the new administration.  And wouldn’t we like to be seen positively by the federal government, especially when it is poised to dole out $850+ billion in stimulus spending in the months and years to come?