HousingWire.com, June 25th, 2012
Mortgage industry must act collectively
If mortgage principal reductions were applied on a large scale, there could be large neighborhood effects, raising a sense of optimism among homeowners and bolstering the value of all homes and, ultimately, the whole economy, says Robert Shiller, professor of economics and finance at Yale, who co-developed what is now the Standard & Poor’s Case-Shiller Home Price Indices. But mortgage lenders lack a group strategy where one is sorely needed, Shiller said.
Reviving real estate requires collective action, Shiller contends, in a piece published Sunday in The New York Times.
He also notes that the concept of eminent domain could be applied to mortgages. Governments could seize underwater mortgages, paying investors fair market value for them. The fair market value is arguably far below their face value, given the likelihood of default, with its attendant costs, he argues.
US banks aren’t ready for looming euro crisis
Simon Johnson, a professor at the MIT Sloan School of Management, says in Bloomberg that the euro area faces a major economic crisis that could affect large U.S.-run banks.
“Personally, I’m most worried about the balance sheets of the really big banks,” he writes. “For example, in recently released highlights from its so-called living will, JPMorgan Chase & Co. revealed that $50 billion in losses could hypothetically bring down the bank.”
The Bank of England set up emergency liquidity facilities, and continues to press for more bank capital, and Simon believes the Federal Reserve should apply the same approach to big U.S. banks — with an emergency and across-the-board suspension of dividend payments, but says it won’t.
“The Fed is convinced that its recent stress tests show U.S. banks have enough capital even though these tests didn’t model serious euro dissolution risk and the effect on global derivatives markets,” Simon contends.
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