6 ms·

I saw a proposal recently that suggested the government mandate that existing loans (mortgages and business loans primarily) add the deferred period to the back

I saw a proposal recently that suggested the government mandate that existing loans (mortgages and business loans primarily) add the deferred period to the back of the loan, interest free. So if the lockdown is 3 months long, then your 72 month loan becomes a 75 month loan with an internal interest free 3-month period. This feels like a reasonable compromise to just nullifying the debts altogether, considering what an accounting nightmare that would be.

nickff 6y ago
I have been thinking about these issues since the beginning of the crisis, and the two big questions I have are: 1) What do you do about bonds? A very large proportion of all debt is packaged into bonds, and reducing their yield will have a substantial effect on many pensions 2) Who is going to pay the wages of the people paid to administer these loans? Are they going to accept a deferral of their wages? I am not trying to dismiss your idea; I had many similar ones early on, but I couldn't figure out how to square the circle.
- toomuchtodo 6y ago
  > 1) What do you do about bonds? A very large proportion of all debt is packaged into bonds, and reducing their yield will have a substantial effect on many pensions US Treasury pays bondholders some, but not all, of the interest income due. Shared haircut between bondholders and the taxpayers. This is a catastrophic loss with a nation state providing what amounts to insurance, and incredibly cheaper not only economically, but from the struggle and hardship many would face from foreclosure and relocation. > 2) Who is going to pay the wages of the people paid to administer these loans? Are they going to accept a deferral of their wages? PPP loans (forgiven when used for payroll) for mortgage servicers. Those folks are still going to be needed to account for bondholder payments, with the Treasury picking up the tab instead of homeowners.
  - nickff 6y ago
    A taxpayer bailout solves a bunch of problems, at the expense of non-mortgage holders (AKA renters). It seems unjust to take from renters and give to property-holders, given that the latter are generally more affluent, and knowingly took a risk (by taking out a loan).
    - toomuchtodo 6y ago
      > It seems unjust to take from renters and give to property-holders, given that the latter are generally more affluent, and knowingly took a risk (by taking out a loan). Life isn't fair. Renters have landlords with mortgages also, and renters are just as challenged as homeowners currently (30+ million unemployed, 1/5th of the US working population). Broad policy decisions have some moral hazard to be deprioritized. The goal isn't fairness, it is to return to economical equilibrium as rapidly as possible.
      - nickff 6y ago
        Your proposal would stabilize the situation, but I am not sure why this bailout is better or worse than other proposed bailouts. We can't go bail everyone out, unless we want to go into hyperinflation. I am not saying I have an answer, I just think there are deep problems with these ideas.
        toomuchtodo 6y ago
        There are always deep problems when the problems are complex. This does not mean you take your time. Just as the Obama administration quickly moved GM through a Chapter 11 reorganization [1] despite objections by free market proponents and shareholders (to save GM workers' jobs), and drastic actions was taken by the Treasury and the Fed to save certain financial services firms (merging them into stronger entities) after the failure of Lehman Brothers during the 2008 GFC [2], complaints can saved for the history book on the topic. In the meantime, move fast to avoid suffering at scale. I'm not saying you're wrong, by any means, but that you have to be comfortable with your solution being unfair and suboptimal. It is not the best course of action, but the least worst course of action. [1] https://en.wikipedia.org/wiki/General_Motors_Chapter_11_reorganization https://en.wikipedia.org/wiki/General_Motors_Chapter_11_reor... [2] https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%9308 https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80...
  - 0x8BADF00D 6y ago
    The Fed can’t keep money printing forever. You’ll see.
    - toomuchtodo 6y ago
      > The Fed can’t keep money printing forever. Based on Japan, this does not appear to be the case (Bank of Japan holdings are ~110% of GDP). We can print until we can't, and from economic indicators, we have a ways to go before inflation (hyper or otherwise) is going to be cause for concern (education and healthcare aren't inflating because of currency devaluation, but because of regulatory capture).
      - 0x8BADF00D 6y ago
        Those indicators are provided by the government itself. And even if you believe those clearly doctored numbers, there is a cause for concern. Particularly with the amount that’s being added to the money supply daily. It’s not sustainable.
        toomuchtodo 6y ago
        Let's pretend that government statistics are wildly manipulated, and that your thesis is sound. I ask the following: 1. Reliable rebuttal data sources to government inflation statistics. 2. Proof that it isn't sustainable besides conjecture (as I mentioned, Japan is economically stable and a first world country with an enormous amount of debt that will never get paid back, while parts of Europe have negative interest rates and still have a relatively high standard of living). Yes, if you’re not first world (Venezuela, Zimbabwe) this doesn’t work. But the US dollar is a reserve currency and US treasuries are the safest asset in the world. When you need to spend good will in currency value form, you spend it.
      - AnimalMuppet 6y ago
        The economy isn't actually money. The economy is really stuff; money is just a mechanism for moving the stuff around. The problem is, if we want stuff (food and cars and electricity and software), someone has to make the stuff. We can print money until the cows come home, but that still fails if there aren't any cows. Japan has managed to keep producing enough to run the actual economy, and has shuffled paper around to keep the books from breaking. The US can do that, too, for a while. But the economy that produces stuff has to come back before too long, or we're going to have actual shortages in a way that printing more money cannot solve.
- jerf 6y ago
  You speak as if you're hunting for an option where nothing bad happens to anyone? The bonds are going to fail somehow; the question is in the allocation of that failure, not whether they fail. (Partial failure, not total failure.)
  - nickff 6y ago
    That's the big problem for me; I would like for nobody to get hurt, but it seems that the holder of the secured debt has some contractual rights. Given the situation, I don't see how a third party has the right to step in and take from one party to give to the other. Ideally we'd have debt-holders negotiating solutions with their counter-parties, but that seems difficult with securitized loans.
    - AnimalMuppet 6y ago
      Well... "a contract is a contract", but there's some recognition that extraordinary circumstances can need special treatment. My home insurance, for example, has clauses about "acts of God" and "acts of war". (Specifically, earthquakes are included in "acts of God" - or maybe they're specifically excluded, in any event, the policy doesn't cover them. Tornadoes and hurricanes might also be excluded. But I don't live in tornado country; I do live in an area that can have earthquakes.)
- pm90 6y ago
  Not everyone has lost their jobs. Folks that still have an income should be paying their mortgages/rent on schedule. Those who can’t can defer. This way there’s a reduction in income but not a total collapse.
  - nickff 6y ago
    You'd be a fool not to defer, if the deferral is at almost no cost. We have seen that people will take the financial path of least resistance (as happened with non-recourse loans in the financial crisis), so I wouldn't depend on payment by those who can.
    - kelnos 6y ago
      Is everyone eligible for deferment, regardless of their financial or employment situation? If so, that seems incredibly short-sighted policy-wise.
      - pm90 6y ago
        Means testing would cause more problems than it can solve. A somewhat fair compromise would be to increase the amount owed a tiny bit to encourage those who can pay to continue paying.
SpicyLemonZest 6y ago
I'm not sure if that's really simpler. I don't know enough accounting to say for sure, but I wouldn't expect the effects of lengthening all loans 3 months to be particularly easy to calculate.
- thinkingkong 6y ago
  Yeah I hate it when the math is too difficult to not screw people over.
  - wutbrodo 6y ago
    This is an excellent demonstration of one of the reasons the politics of economic policy is so difficult: so many people think that financial crises are caused and averted by magic, and "math" is simply some detached-from-reality thought exercise. It's the modern version of an ancient villager sacrificing goats to ensure a good harvest and sneering at good irrigation practices or crop rotation. Paying attention to the economic effects of a policy as it ripples through the financial system isn't taking a position on who should be protected or prioritized between (eg) capital and labor. Economic outcomes for labor are downstream of the financial system too, which is why the effects of the 2008 GFC didn't play out as simply "the richest people get slightly poorer". Someone 100% interested in outcomes for the poor and middle-class (employment, income, etc) still needs to understand the "math" of how proposed policy will play out in the real world. You may think you're on the side of the rights of labor/the masses against the rich, but you're actually just standing up for ignorance and blind superstition over reality, an approach which hurts rich and poor alike. (Unless, of course, your only goal is to get high on your own misinformed outrage, in which case, congrats)
    - thinkingkong 6y ago
      Other than misinterpreting an (obviously?) sarcastic comment I'm not sure what point you're trying to make. By all means let's not duck into any blind alleys. But decisions need to be made in a relatively short timeframe, and a lot of investigation itself is typically waved off as "can't replicate, wont fix", simply because it's perceived as difficult.
Mvandenbergh 6y ago
That's how it works in the UK. Mortgages that are paused are either extended (rare) or have the interest and additional principal rolled into future payments. It doesn't work so well for shorter loans though because the payments get very high.
- brummm 6y ago
  That's not what the poster above you meant, though. He specifically said the deferment period should be interest free.
nbclark 6y ago
Not sure about other banks, but Wells Fargo offered this to me last month (just as a UI in their mobile app).
0xEFF 6y ago
In the U.S. it’s an unreasonable proposal because it violates the contracts clause of the Constitution.
- sio8ohPi 6y ago
  To be clear, it is not unconstitutional for the federal government to do so. The contract clause only restrains the states.
  - xyzzyz 6y ago
    That depends on what word “unconstitutional” means. Would people who originally wrote the constitution consider it unconstitutional for federal government to do it? Almost surely, yes: they wrote an explicit list of things the federal government can do, and if something was not on the list, it was understood that the federal government cannot do it. Of course, in early 20th century this has all been thrown through the window by the Progressive era Supreme Court, and contrary to intent of the framers of the constitution, it became clear that nothing restrains federal government other than what a group of nine says, and even that is not always true.
    - Finnucane 6y ago
      In this case the language of the Contracts Clause is entirely clear that it applies to the states.
      - mattkrause 6y ago
        To put it more bluntly, it literally starts with the words "No State shall...." If you want to go all originalist, the point was to prohibit private bills benefiting a specific person, which is almost the opposite of what's proposed here.
        Finnucane 6y ago
        Well, we know the founders were all like, this is final word, we have foreseen all contingencies, if you ever do anything we wouldn’t like we will haunt you from the grave.
deleted 6y ago
[deleted]
renewiltord 6y ago
That's what we've been doing with our clients who can't afford it right now. We just extend their licence 3 months when they've already paid us. They're happy, we don't get a meaningless churn and it slows us down only 25%.
twblalock 6y ago
Any proposal for forgiving or delaying payments needs to consider the position of the lenders, or we are going to end up with another bank bailout.
Animats 6y ago
Add the deferred payment to the back of the loan at the current Fed funds rate. That's currently 0.25%. Banks can borrow at that rate, so they don't lose money on this. Cheaper than processing a default. Banks don't want to foreclose; unloading the real estate is a huge money-loser.

nickff 6y ago

I have been thinking about these issues since the beginning of the crisis, and the two big questions I have are: 1) What do you do about bonds? A very large proportion of all debt is packaged into bonds, and reducing their yield will have a substantial effect on many pensions 2) Who is going to pay the wages of the people paid to administer these loans? Are they going to accept a deferral of their wages? I am not trying to dismiss your idea; I had many similar ones early on, but I couldn't figure out how to square the circle.

toomuchtodo 6y ago
> 1) What do you do about bonds? A very large proportion of all debt is packaged into bonds, and reducing their yield will have a substantial effect on many pensions US Treasury pays bondholders some, but not all, of the interest income due. Shared haircut between bondholders and the taxpayers. This is a catastrophic loss with a nation state providing what amounts to insurance, and incredibly cheaper not only economically, but from the struggle and hardship many would face from foreclosure and relocation. > 2) Who is going to pay the wages of the people paid to administer these loans? Are they going to accept a deferral of their wages? PPP loans (forgiven when used for payroll) for mortgage servicers. Those folks are still going to be needed to account for bondholder payments, with the Treasury picking up the tab instead of homeowners.
- nickff 6y ago
  A taxpayer bailout solves a bunch of problems, at the expense of non-mortgage holders (AKA renters). It seems unjust to take from renters and give to property-holders, given that the latter are generally more affluent, and knowingly took a risk (by taking out a loan).
  - toomuchtodo 6y ago
    > It seems unjust to take from renters and give to property-holders, given that the latter are generally more affluent, and knowingly took a risk (by taking out a loan). Life isn't fair. Renters have landlords with mortgages also, and renters are just as challenged as homeowners currently (30+ million unemployed, 1/5th of the US working population). Broad policy decisions have some moral hazard to be deprioritized. The goal isn't fairness, it is to return to economical equilibrium as rapidly as possible.
    - nickff 6y ago
      Your proposal would stabilize the situation, but I am not sure why this bailout is better or worse than other proposed bailouts. We can't go bail everyone out, unless we want to go into hyperinflation. I am not saying I have an answer, I just think there are deep problems with these ideas.
      - toomuchtodo 6y ago
        There are always deep problems when the problems are complex. This does not mean you take your time. Just as the Obama administration quickly moved GM through a Chapter 11 reorganization [1] despite objections by free market proponents and shareholders (to save GM workers' jobs), and drastic actions was taken by the Treasury and the Fed to save certain financial services firms (merging them into stronger entities) after the failure of Lehman Brothers during the 2008 GFC [2], complaints can saved for the history book on the topic. In the meantime, move fast to avoid suffering at scale. I'm not saying you're wrong, by any means, but that you have to be comfortable with your solution being unfair and suboptimal. It is not the best course of action, but the least worst course of action. [1] https://en.wikipedia.org/wiki/General_Motors_Chapter_11_reorganization https://en.wikipedia.org/wiki/General_Motors_Chapter_11_reor... [2] https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%9308 https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80...
- 0x8BADF00D 6y ago
  The Fed can’t keep money printing forever. You’ll see.
  - toomuchtodo 6y ago
    > The Fed can’t keep money printing forever. Based on Japan, this does not appear to be the case (Bank of Japan holdings are ~110% of GDP). We can print until we can't, and from economic indicators, we have a ways to go before inflation (hyper or otherwise) is going to be cause for concern (education and healthcare aren't inflating because of currency devaluation, but because of regulatory capture).
    - 0x8BADF00D 6y ago
      Those indicators are provided by the government itself. And even if you believe those clearly doctored numbers, there is a cause for concern. Particularly with the amount that’s being added to the money supply daily. It’s not sustainable.
      - toomuchtodo 6y ago
        Let's pretend that government statistics are wildly manipulated, and that your thesis is sound. I ask the following: 1. Reliable rebuttal data sources to government inflation statistics. 2. Proof that it isn't sustainable besides conjecture (as I mentioned, Japan is economically stable and a first world country with an enormous amount of debt that will never get paid back, while parts of Europe have negative interest rates and still have a relatively high standard of living). Yes, if you’re not first world (Venezuela, Zimbabwe) this doesn’t work. But the US dollar is a reserve currency and US treasuries are the safest asset in the world. When you need to spend good will in currency value form, you spend it.
    - AnimalMuppet 6y ago
      The economy isn't actually money. The economy is really stuff; money is just a mechanism for moving the stuff around. The problem is, if we want stuff (food and cars and electricity and software), someone has to make the stuff. We can print money until the cows come home, but that still fails if there aren't any cows. Japan has managed to keep producing enough to run the actual economy, and has shuffled paper around to keep the books from breaking. The US can do that, too, for a while. But the economy that produces stuff has to come back before too long, or we're going to have actual shortages in a way that printing more money cannot solve.
jerf 6y ago
You speak as if you're hunting for an option where nothing bad happens to anyone? The bonds are going to fail somehow; the question is in the allocation of that failure, not whether they fail. (Partial failure, not total failure.)
- nickff 6y ago
  That's the big problem for me; I would like for nobody to get hurt, but it seems that the holder of the secured debt has some contractual rights. Given the situation, I don't see how a third party has the right to step in and take from one party to give to the other. Ideally we'd have debt-holders negotiating solutions with their counter-parties, but that seems difficult with securitized loans.
  - AnimalMuppet 6y ago
    Well... "a contract is a contract", but there's some recognition that extraordinary circumstances can need special treatment. My home insurance, for example, has clauses about "acts of God" and "acts of war". (Specifically, earthquakes are included in "acts of God" - or maybe they're specifically excluded, in any event, the policy doesn't cover them. Tornadoes and hurricanes might also be excluded. But I don't live in tornado country; I do live in an area that can have earthquakes.)
pm90 6y ago
Not everyone has lost their jobs. Folks that still have an income should be paying their mortgages/rent on schedule. Those who can’t can defer. This way there’s a reduction in income but not a total collapse.
- nickff 6y ago
  You'd be a fool not to defer, if the deferral is at almost no cost. We have seen that people will take the financial path of least resistance (as happened with non-recourse loans in the financial crisis), so I wouldn't depend on payment by those who can.
  - kelnos 6y ago
    Is everyone eligible for deferment, regardless of their financial or employment situation? If so, that seems incredibly short-sighted policy-wise.
    - pm90 6y ago
      Means testing would cause more problems than it can solve. A somewhat fair compromise would be to increase the amount owed a tiny bit to encourage those who can pay to continue paying.

SpicyLemonZest 6y ago

I'm not sure if that's really simpler. I don't know enough accounting to say for sure, but I wouldn't expect the effects of lengthening all loans 3 months to be particularly easy to calculate.

thinkingkong 6y ago
Yeah I hate it when the math is too difficult to not screw people over.
- wutbrodo 6y ago
  This is an excellent demonstration of one of the reasons the politics of economic policy is so difficult: so many people think that financial crises are caused and averted by magic, and "math" is simply some detached-from-reality thought exercise. It's the modern version of an ancient villager sacrificing goats to ensure a good harvest and sneering at good irrigation practices or crop rotation. Paying attention to the economic effects of a policy as it ripples through the financial system isn't taking a position on who should be protected or prioritized between (eg) capital and labor. Economic outcomes for labor are downstream of the financial system too, which is why the effects of the 2008 GFC didn't play out as simply "the richest people get slightly poorer". Someone 100% interested in outcomes for the poor and middle-class (employment, income, etc) still needs to understand the "math" of how proposed policy will play out in the real world. You may think you're on the side of the rights of labor/the masses against the rich, but you're actually just standing up for ignorance and blind superstition over reality, an approach which hurts rich and poor alike. (Unless, of course, your only goal is to get high on your own misinformed outrage, in which case, congrats)
  - thinkingkong 6y ago
    Other than misinterpreting an (obviously?) sarcastic comment I'm not sure what point you're trying to make. By all means let's not duck into any blind alleys. But decisions need to be made in a relatively short timeframe, and a lot of investigation itself is typically waved off as "can't replicate, wont fix", simply because it's perceived as difficult.

Mvandenbergh 6y ago

That's how it works in the UK. Mortgages that are paused are either extended (rare) or have the interest and additional principal rolled into future payments. It doesn't work so well for shorter loans though because the payments get very high.

brummm 6y ago
That's not what the poster above you meant, though. He specifically said the deferment period should be interest free.

nbclark 6y ago

Not sure about other banks, but Wells Fargo offered this to me last month (just as a UI in their mobile app).

0xEFF 6y ago

In the U.S. it’s an unreasonable proposal because it violates the contracts clause of the Constitution.

sio8ohPi 6y ago
To be clear, it is not unconstitutional for the federal government to do so. The contract clause only restrains the states.
- xyzzyz 6y ago
  That depends on what word “unconstitutional” means. Would people who originally wrote the constitution consider it unconstitutional for federal government to do it? Almost surely, yes: they wrote an explicit list of things the federal government can do, and if something was not on the list, it was understood that the federal government cannot do it. Of course, in early 20th century this has all been thrown through the window by the Progressive era Supreme Court, and contrary to intent of the framers of the constitution, it became clear that nothing restrains federal government other than what a group of nine says, and even that is not always true.
  - Finnucane 6y ago
    In this case the language of the Contracts Clause is entirely clear that it applies to the states.
    - mattkrause 6y ago
      To put it more bluntly, it literally starts with the words "No State shall...." If you want to go all originalist, the point was to prohibit private bills benefiting a specific person, which is almost the opposite of what's proposed here.
      - Finnucane 6y ago
        Well, we know the founders were all like, this is final word, we have foreseen all contingencies, if you ever do anything we wouldn’t like we will haunt you from the grave.

deleted 6y ago

[deleted]

renewiltord 6y ago

That's what we've been doing with our clients who can't afford it right now. We just extend their licence 3 months when they've already paid us. They're happy, we don't get a meaningless churn and it slows us down only 25%.

twblalock 6y ago

Any proposal for forgiving or delaying payments needs to consider the position of the lenders, or we are going to end up with another bank bailout.

Animats 6y ago

Add the deferred payment to the back of the loan at the current Fed funds rate. That's currently 0.25%. Banks can borrow at that rate, so they don't lose money on this. Cheaper than processing a default. Banks don't want to foreclose; unloading the real estate is a huge money-loser.