Sausages and Laws

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Staffer: Well, we have to have some limit to the assistance.
Senior Staffer: Limit? What are you talking about?
Staffer: I mean, there has to be some end.
Senior Staffer: Make it a time limit, when did the sub-prime crisis start?
Staffer: I don't know, 2005 maybe?
Senior Staffer: Sure. 2005. When did it end?
Staffer: Uh, it's not really over yet, I guess?
Senior Staffer: We need a date, c'mon.
Staffer: Well, I closed on my house in June 2007.
Senior Staffer: Perfect! Mid 2007. So between 2005 and mid-2007.
Staffer: Uh, ok.
Senior Staffer: What about relief?
Staffer: Well, the banks will never go for just letting people off the hook.
Senior Staffer: How long have you worked here?
Staffer: Six months?
Senior Staffer: Right, watch and learn. Want to let our constituents off the hook? Give the opposing party something they want, or threaten them with something they don't want. What do the banks want?
Staffer: The abolition of Mark-to-Market accounting?
Senior Staffer: Well, ok, but why?
Staffer: To dump the really toxic stuff and still limit the size of their write downs?
Senior Staffer: Bingo!
Staffer: How can we do something like that, how can you just....
Senior Staffer: Simple. We'll just write into the legislation how much the homes are worth. Make them write down something, but not too bad.
Staffer: Just... write it in?
Senior Staffer: Right.
Staffer: Like, 75% of the original mortgage?
Senior Staffer: Make it 85%.

Staffer: Uh, ok. 85%. But then what, they still have it on their books.
Senior Staffer: Again, watch and learn. Who sets the underwriting standards for the Federal Housing Administration?
Staffer: Oh, the FHA credit standards-
Senior Staffer: No, once again, who sets the underwriting standards for the FHA?
Staffer: The chairman of the-
Senior Staffer: No, no, no.
Staffer: Uh, we do?
Senior Staffer: Bingo!
Staffer: The FHA will buy the loans!
Senior Staffer: No, no, no. Don't ever say "buy." What do we say when we mean "buy" but we don't really want to sound like we are buying?
Staffer: Guarantee?
Senior Staffer: Right. We are just providing a... what?
Staffer: Safety net?
Senior Staffer: Right.
Staffer: Ok, what about the homeowners? I mean if they defaulted in the first place its because they can't afford the payments.
Senior Staffer: So we change the payments. And we give them certainty in this time of crisis. We fix the payments.
Staffer: But they probably had variable rates and who is going to let them have such a high percentage of income in debt payments from-
Senior Staffer: Stop. Stop. What did we just say?
Staffer: We'll just change the rates to fixed?
Senior Staffer: Right, and?
Staffer: We will... uh...
Senior Staffer: Percentages...?
Staffer: Raise the percentage of monthly income that is permitted to be debt payments?
Senior Staffer: Exactly.
Staffer: To what?
Senior Staffer: What is it now for FHA?
Staffer: 43%.
Senior Staffer: Make it 53%
Staffer: Just add 10%?
Senior Staffer: Hm, that does sound arbitrary, doesn't it. Make it 55%. Then it sounds like some real analysis is behind it.
Staffer: Got it! But, wait a minute. A lot of these people got in trouble because their credit was awful and the banks didn't bother to look. How will the FHA ever approve them with terrible credit scores and now a default or two to boot, I mean-
Senior Staffer: Listen, I'm getting tired of repeating myself. Who controls the underwriting standards?
Staffer: We do.
Senior Staffer: And so?
Staffer: We will... forbid the use of credit scores?
Senior Staffer: Exactly.
Staffer: Uh... ok.
Senior Staffer: I think that's the basics. Mr. Frank? We've got the outline.
Mr. Frank: Let me see. Hmmm. Yes, nice. Yes, very good. Oh, yes, I like this FHA angle. Let's add a provision that reduces the homeowners principal down to the market value too, then we need a good formula to pick "market value," maybe peg it to a date. Make an arbitrary looking date, but make it near the bottom of the market. Do we need the time limits?
Senior Staffer: I think so. They are generous. My own mortgage is eligible if I default.
Staffer: Hey, wait a minute! What about that? What keeps people who have no problem at all from defaulting on purpose now to convert to fixed and reduce the principal size of their loan?
Mr. Frank: Who is this kid?
Senior Staffer: I'm sorry, Mr. Frank, he's new.
Mr. Frank: Harvard?
Senior Staffer: No, Brown, I think.
Mr. Frank: Oh. Oh, ok. Pay attention, son. We are going to require the homeowner to certify that they are not committing fraud. See?
Staffer: Like Countrywide used to do?
Mr. Frank: Exactly, but Countrywide has a lot less capital than we do.
Staffer: Say, this is pretty cool. It is like we can legislate reality.
Mr. Frank: Welcome to the Democratic Party, my son.
Uncle Subprime [WSJ]

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