Saturday, March 29, 2008
Tweet[IWS] CRS: GOVERNMENT INTERVENTION in FINANCIAL MARKETS: Economic and Historic Analysis of Subprime Mortgage Options [25 March 2008]
IWS Documented News Service
_______________________________
Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor---------------------- Stuart Basefsky
New York, NY 10016 -------------------------------Director, IWS News Bureau
________________________________________________________________________
Congressional Research Service (CRS)
Order Code RL34423
Government Interventions in Financial Markets: Economic and Historic Analysis of Subprime Mortgage Options
March 25, 2008
N. Eric Weiss, Analyst in Financial Economics, Government and Finance Division
http://assets.opencrs.com/rpts/RL34423_20080325.pdf
[full-text, 16 pages]
Summary
This report summarizes and analyzes four previous government market
interventions (Home Owners Loan Corporation in 1933, Continental Illinois in 1984,
the savings and loan insurance fund shortfall in 1989, and the Latin American debt
crisis in 1989), in light of current mortgage market conditions. Current proposals to
help delinquent homeowners share many features in common with all of these
actions.
The Home Owners Loan Corporation (HOLC) purchased delinquent mortgages
at a discount and worked with homeowners to restructure the mortgages into more
manageable terms. HOLC accepted slightly more than one million applications from
homeowners to refinance their homes between June 1933 and June 1935. It rejected
488,000 applications, most for "inadequate security" and "lack of distress." HOLC
foreclosed on 194,000 of those it was attempting to assist. At the time, many had
serious concern that HOLC could be a costly undertaking, but when it disbanded in
the early 1950s, HOLC returned a small profit to the government. HOLC
successfully conceived and implemented new ways to contact delinquent
homeowners and, in some cases, help homeowners find new jobs.
In 1984, Continental Illinois National Bank suffered a run after loans that it had
not properly underwritten failed. The Federal Reserve and the Federal Deposit
Insurance Corporation led intervention efforts. There were concerns that allowing
the bank to fail could have serious repercussions throughout the financial system.
This led to the FDIC Improvement Act of 1991.
In the 1980s, the Federal Savings and Loan Insurance Corporation approached
insolvency because of the failure of member savings and loan institutions, also
known as thrifts. Working together, Congress and the George H. W. Bush
administration established the Resolution Trust Corporation (RTC), which was
funded by the Resolution Funding Corporation (REFCORP). The thrift industry is
still paying off the intervention operation, which is estimated to have cost $152.9
billion.
In 1989, Brady bonds helped less developed countries, mostly in Latin America,
restructure their debt by renegotiating terms and writing down some of the loans.
The plan, proposed by then-U.S. Treasury Secretary Nicholas F. Brady, overcame
coordination problems in previous restructuring efforts. In addition to writing down
some loans, the plan included some interest rate reductions, and having debtor
nations post U.S. Treasury bonds as collateral with the Federal Reserve.
Approximately $91.8 billion was refinanced under the plan. Repayment continues
today.
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
A Brief Overview of Subprime Delinquency and Default . . . . . . . . . . . . . . . . . . . 3
The Nature of the Subprime Reset Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Selected Previous Government Interventions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Home Owners' Loan Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Contemporary Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Application to Subprime Mortgage Restructuring . . . . . . . . . . . . . . . . . 6
Continental Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Contemporary Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Application to Subprime Mortgage Restructuring . . . . . . . . . . . . . . . . . 7
Savings and Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Contemporary Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Application to Subprime Mortgage Restructuring . . . . . . . . . . . . . . . . . 9
Brady Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Contemporary Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Application to Subprime Mortgage Restructuring . . . . . . . . . . . . . . . . 10
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
______________________________
This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.
Stuart Basefsky
Director, IWS News Bureau
Institute for Workplace Studies
Cornell/ILR School
16 E. 34th Street, 4th Floor
New York, NY 10016
Telephone: (607) 255-2703
Fax: (607) 255-9641
E-mail: smb6@cornell.edu
****************************************
_______________________________
Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor---------------------- Stuart Basefsky
New York, NY 10016 -------------------------------Director, IWS News Bureau
________________________________________________________________________
Congressional Research Service (CRS)
Order Code RL34423
Government Interventions in Financial Markets: Economic and Historic Analysis of Subprime Mortgage Options
March 25, 2008
N. Eric Weiss, Analyst in Financial Economics, Government and Finance Division
http://assets.opencrs.com/rpts/RL34423_20080325.pdf
[full-text, 16 pages]
Summary
This report summarizes and analyzes four previous government market
interventions (Home Owners Loan Corporation in 1933, Continental Illinois in 1984,
the savings and loan insurance fund shortfall in 1989, and the Latin American debt
crisis in 1989), in light of current mortgage market conditions. Current proposals to
help delinquent homeowners share many features in common with all of these
actions.
The Home Owners Loan Corporation (HOLC) purchased delinquent mortgages
at a discount and worked with homeowners to restructure the mortgages into more
manageable terms. HOLC accepted slightly more than one million applications from
homeowners to refinance their homes between June 1933 and June 1935. It rejected
488,000 applications, most for "inadequate security" and "lack of distress." HOLC
foreclosed on 194,000 of those it was attempting to assist. At the time, many had
serious concern that HOLC could be a costly undertaking, but when it disbanded in
the early 1950s, HOLC returned a small profit to the government. HOLC
successfully conceived and implemented new ways to contact delinquent
homeowners and, in some cases, help homeowners find new jobs.
In 1984, Continental Illinois National Bank suffered a run after loans that it had
not properly underwritten failed. The Federal Reserve and the Federal Deposit
Insurance Corporation led intervention efforts. There were concerns that allowing
the bank to fail could have serious repercussions throughout the financial system.
This led to the FDIC Improvement Act of 1991.
In the 1980s, the Federal Savings and Loan Insurance Corporation approached
insolvency because of the failure of member savings and loan institutions, also
known as thrifts. Working together, Congress and the George H. W. Bush
administration established the Resolution Trust Corporation (RTC), which was
funded by the Resolution Funding Corporation (REFCORP). The thrift industry is
still paying off the intervention operation, which is estimated to have cost $152.9
billion.
In 1989, Brady bonds helped less developed countries, mostly in Latin America,
restructure their debt by renegotiating terms and writing down some of the loans.
The plan, proposed by then-U.S. Treasury Secretary Nicholas F. Brady, overcame
coordination problems in previous restructuring efforts. In addition to writing down
some loans, the plan included some interest rate reductions, and having debtor
nations post U.S. Treasury bonds as collateral with the Federal Reserve.
Approximately $91.8 billion was refinanced under the plan. Repayment continues
today.
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
A Brief Overview of Subprime Delinquency and Default . . . . . . . . . . . . . . . . . . . 3
The Nature of the Subprime Reset Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Selected Previous Government Interventions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Home Owners' Loan Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Contemporary Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Application to Subprime Mortgage Restructuring . . . . . . . . . . . . . . . . . 6
Continental Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Contemporary Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Application to Subprime Mortgage Restructuring . . . . . . . . . . . . . . . . . 7
Savings and Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Contemporary Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Application to Subprime Mortgage Restructuring . . . . . . . . . . . . . . . . . 9
Brady Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Contemporary Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Application to Subprime Mortgage Restructuring . . . . . . . . . . . . . . . . 10
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
______________________________
This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.
Stuart Basefsky
Director, IWS News Bureau
Institute for Workplace Studies
Cornell/ILR School
16 E. 34th Street, 4th Floor
New York, NY 10016
Telephone: (607) 255-2703
Fax: (607) 255-9641
E-mail: smb6@cornell.edu
****************************************
# posted by SBasefsky : 1:10 PM
