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Meanwhile in another area of California not too far away -- big government -- to solve the housing crisis has resurfaced.
In San Bernardino County.
Now Citi considering using its power under an amended eminent domain yes I can say -- To -- is delinquent properties using taxpayer dollars to make the -- is more affordable for homeowners.
Critics are calling it a big government power grab at the expense of taxpayers.
And now the biggest government of the -- the federal bureaucrats in Washington are saying hey it's a crazy idea.
Joining me now mark Calabria is director of financial regulation studies at the Cato Institute.
Robert pocket is of Cornell University block professor Robert and let you weigh in here first why is this a good idea.
Well -- -- -- couple things and I have to correct in a few things right let's not using taxpayer money and it's -- a government -- essentially what we're doing is using eminent domain authority money.
Really no no no no this is actually money supply by private investors including the current bondholders of the MBS.
Yeah that's what Ed DeMarco says.
Well if it -- says that he's wrong -- right -- there's actually no tax Payer dollars used at all here write this that's that's part of the whole point -- the public private partnership uses private money is well.
And you support this idea -- using the power the government eminent domain -- to really try to set the housing market right why do you like it.
Well that's it it is a good -- -- have to correct you on -- they're not taking properties right they're not taking home the ideas of take underwater mortgage loans that can't currently be sold by the private label like your favorite etc.
I can tell.
No no no it's it's it was -- and that the I don't mind -- that is just inaccurate right it's just not the case here right regardless.
You may -- -- do you think it's inaccurate to say.
That the government is stepping in and and using power.
At its its federal power to shake up a marketplace and then make big changes.
I think -- -- -- -- what I think to market was trying to say in terms of taxpayer losses.
It's certainly we can quibble over yes private investors are providing -- -- potentially other counties.
With the funds to pay you take -- and of course that raises questions of who should be paying just compensation.
Well what to market was raising is that Freddie and Feeney.
Not just -- loads of Iran's but they also hold a very large portfolios of private securities and often reminded so far what is being target is private securities.
And that -- -- and -- would lower the value of the private securities it's -- you when eyes a taxpayer over Freddie and Fannie essentially.
That a phrase Citi take loss from their portfolio of private label securities you -- I would take a hit.
Now there's also the point that I could mark a great job on to machines and -- -- you'll get back to your second play Robert what do you say about that.
Yes it isn't too quick problems there right there that the first is is that Fannie and Freddie actually hold only about 1%.
Bit over 1% of the toward total portfolio that takes the form of interest in PLS.
That's the first -- second place is it actually the on the demand thirty will be using to -- would be used to raise the value be underwater Elantra the whole point is that when they're underwater they're insignificant danger of default.
So if you can actually right on the principle you lower the danger recall you risk -- default you raise the expected value -- thereby raise a valuable.
As -- and here's why do you can move very much as a group Robert on this because together targeting current ones what -- -- essentially saying.
Is that the promise to pay your mortgage is worth nothing.
He is saved because its underwater it's value is reduced we know that the vast overwhelming majority of underwater mortgages.
Actually -- They don't -- default very small numbers of default.
And so again Roberts argument is that my promise to you to pay my obligations were zero -- -- -- 00.
At my lowest.
Probability of repayment rates -- zero it's it is simply a little lowers the -- probability repayment.
Face you -- primarily from like a hundred to maybe 95 or that you're not low in the resolution 100 disappointment this -- restored -- over the expected value of the -- that way right and you can actually raised and -- expected value by writing down principal.
Everybody seems to agree on this right all the experts Laurie Goodman out there.
The studies -- FHFA itself oftentimes indicate that we did -- sees himself anybody wanna sign Lori Lori has said we should be only modify loans already in default not current lunch -- actually been critical this plan that strategy -- -- you know she's she's critical of the idea.
Sorry -- only deliver a little hunt tonight so let's not -- gloriously.
But what I would like to bring up with it should be -- iconic.
Is that the DeMarco is also against this principal reduction plan the president has put out -- -- -- like that -- and for some -- -- same reasons that.
There's no encouragement to regular homeowners to pay their mortgage of everybody's getting for began then and the government stepping and then making all these rewriting mortgages Willy Nilly.
It -- quickly in.
Yeah -- does this is it that there's plenty of incentive to go ahead and repay the loans appoint as it has to be possible to -- them when -- LTV is a 170%.
Right you're almost a year you're almost guaranteed to default or go delinquent at some point.
-- things worth pointing out is that you know it's.
One reason that we start by targeting performing -- -- because that you avoid the moral hazard problem right you say you look at the loans are being repaid house you're not rewarding people for having gone the way Ecuador defaulted.
Right let's let's have a -- we're gonna -- -- mark last word here very quickly Robert there were fundamental problem is doesn't fix the fundamental problems the housing market which is weak demand excess supply is that your -- credit -- to the housing market which are reduced man and actually have prices go down further we think you know again at the -- but doesn't get the fundamental problem in the housing market.
Negative equity is not the fundamental problem in the face and how that mark that is exactly where we disagree -- -- family that they are guys thanks for coming on and next time -- Robert well let consult you -- and -- to the segment.
-- and -- the buy side.