Speaking at the Chicago Board Options Exchange conference in California, David Patterson, founder of Northwater Capital Management, rejected the characterisation of the financial crisis as a 10 or 12 standard deviation event, comparing it to a feedback loop that has to have at least one of its constituent elements removed or disrupted before the cycle begins to collapse.
"The more underwater mortgages you have the more defaults you will see, and more defaults mean more repossessions, which serve to further depress house prices, beginning the cycle of underwater mortgages once again," Patterson explained.
"If you have a reinforcing loop like this, what is the best intervention? The Obama administration thinks the best way to work on this is to reduce the mortgage principal for homeowners who are underwater, so they will be less underwater, causing fewer defaults and so on. That's true, except that the plan is not likely to capture everyone who is in that situation under the plan, so the cycle is likely to continue," he added.
Instead, Patterson called for a national house price floor to arrest the slide in house prices being seen across the US.
"My suggestion is to have the administration put in a bid to buy any house in the country for what it was worth on March 1, 2009 and have that bid mechanism in place for the next 10 years. No-one would sell to the administration and that would allow prices to move up, since they know they can't go lower. The Treasury is using a tremendous amount of money to fix mortgages but it would be a hell of a lot cheaper to make that kind of a move in the price of houses," Patterson claimed.
Delegates were sceptical as to the practicality of the measure, most pointedly questioning how the scheme would legislate for the wide disparity in the value of houses and why the Treasury has not floated such an idea in public if it would indeed prove to be workable.
"I don't think the Treasury has not got the idea in its head yet. It is a very dramatic move and there would be some political issues to deal with, but the benefit would be felt all across society, it's not just bailing out some people and not others," Patterson concluded.
The week on Risk.net, October 6-12, 2017Receive this by email