Tuesday, February 24, 2009

Glaeser on Mortgages

There's so much good sense in Edward L. Glaeser's view of the mortgage market that it is really a surprise to see him go completely off the rails when it comes to his proposal for reform (link). He's right that foreclosure moratoria are just a form of inefficient wealth transfer to a not-terribly beguiling tranche of borrowers. He's right to say that we should find a way to make foreclosure less costly. He's right--and this is important--to say tht lots of workouts would happen if we could figure out some way to unlock the right incentives from the decentralized anonymity of securitization.

But as to settlements imposed by the bankruptcy court--well, I suppose he's right again, insofar as he is saying that these imposed settlements are no more than a second best. But he vastly overestimates the novelty of using the bankruptcy courts to impose settlements. As others have said--heck, as I have said--bankruptcy judges have been doing this for a long time, with respect to every form of collateral except the home mortgage. And precisely here is where Glaeser gets silliest, characterizing these bankruptcy judges as 'without specific expertise in housing markets."

Whoah, big boy, I don't know where you have been spending your time lately, but it can't have been the bankruptcy court: quite contrary to what you suggest here, I'd say I can't think of any cadre more qualified to understand these distressed deals--their structure and context--than the judges who deal with it every day. Rather than the horror of the bankruptcy court, Glaeser wants to transfer the work to "a formal renegotiation authority [ that] would essentially duplicate what a hyper-efficient bank would do if it owned the mortgage in its entirety." I can't imagine where he expects to get these paladins of efficiency would come from--unemployed bankers, I suppose--but really don't see how (if the job must be done at all) he can improve on the judges who do a large part of the job alrady.

Footnote: since I'm blanketing the soil with rose petals, I might as well add that Glaeser is right again when he said we're way past due for scuttling the home mortgage deduction (link). And rightest of all when he admits that his proposal is "quixotic."

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