Ideas abound these days for dealing with the mortgage crisis — so many, in fact, that there is a danger some of the best may be lost in the shuffle.
There seems to be a consensus on the pressing need for some mechanism to restructure mortgages and forestall foreclosures. But the fact that the overwhelming majority of mortgages are held in securitization pools, administered by servicers who owe fiduciary duties to all the holders of bonds issued by such pools, seems to present an intractable obstacle to restructuring.
There is also the question of who should carry out such restructurings. Should we leave it to the states or to federal entities, or should there be some centralized authority that could establish uniform standards and procedures?
Two of the most promising ideas for dealing with this situation have been put forth by Prof. Alan S. Blinder of Princeton University, a former vice chairman of the Federal Reserve Board, and Prof. Howell E. Jackson of Harvard Law School.
In an op-ed early this year in The New York Times, Prof. Blinder suggested the recreation of the Home Owners Loan Corp., a government entity created in June 1933 to buy distressed mortgages from lenders and restructure them. It was initially capitalized by the Treasury Department and was authorized to issue its own bonds to fund the purchase of mortgages.
Prof. Jackson has suggested that the Treasury use its bailout funds to buy entire mortgage pools and, if necessary and with congressional authority, use the power of eminent domain to force the purchase of these assets, with the courts available to rule on the fairness of the price.
This would facilitate workouts and restructurings — not to mention foreclosure policy — by vesting responsibility in an agency that actually owned the mortgages. It also would force the liquidation of the bonds issued in the securitizations with a recognition of whatever losses were inherent in the pools.
A sensible approach to the problem might be to combine these ideas — create a new version of the Home Owners Loan Corp. with the power of eminent domain to force purchases where negotiated ones are not possible.
Creating a government entity from scratch would be a formidable and time-consuming challenge, and the Treasury is not really set up to handle such additional responsibilities.
But there is an approach that might accomplish this objective in a more timely and efficient fashion: Convert the Office of Thrift Supervision into a government corporation with powers similar to the Home Owners Loan Corp.'s and eminent domain authority, and give it the mission of acquiring mortgages and pools, carrying out comprehensive modifications, and establishing policies with respect to foreclosures on the mortgages it acquires.
There are several reasons the OTS would be an ideal candidate to take on such functions.
First, it already has a nationwide superstructure, with well over 1,000 employees and regional offices across the country that could be readily revamped.
Second, the OTS has intimate familiarity with the mortgage market. It is the successor to the Federal Home Loan Bank Board, which was created in 1932, a year before the Home Owners Loan Corp., for the very purpose of providing relief to the mortgage market.
Third, the constituency of federally insured thrifts is diminishing. With the recent loss of Countrywide, IndyMac, and Washington Mutual, among others, and the prospective loss of even more institutions, some have questioned the agency's viability and suggested that it be eliminated. It would make good sense to put the OTS superstructure and resources to a new and productive use while it is still operating.
As a corollary to such a reinvention of the OTS, it would be appropriate to revamp its mission by phasing out the federal thrift charter.
Having a specialized charter for mortgage lenders no longer makes sense — the OTS itself has supported a significant broadening of the charter beyond the creation of mortgage-related assets. Moreover, it was once desirable to have a thrift charter to allow diversified activities at the parent company level, but that advantage has largely disappeared.
If the OTS were to be transmuted, federal thrifts would be converted to a national or state bank charter, with supervision of state-chartered institutions being transferred to the Federal Deposit Insurance Corp. Savings and loan holding companies would become bank holding companies regulated by the Fed.
Such a program would present a number of issues, not the least of which is whether the new entity could be funded at a level sufficient to effect significant restructurings. The pricing of purchases would also present obvious challenges, as would the means of restructuring. But these are issues any new agency or restructuring program would face; they would not be unique to a recreated OTS.
In addition, transferring the supervision of converted thrifts to the OCC or the FDIC would put additional demands on those agencies, but the OTS conversion would free up former thrift examiners, who could be allocated to the successor agencies in proportion to the charter choices made by the converted thrifts.
The need for prompt action is compelling. As Congress and the incoming administration weigh and debate the alternatives, the option of reconstituting the Office of Thrift Supervision should be on the table.