The trust factor in mortgage bailouts
By now, most Americans have lost track of who is being rescued by Washington. AIG, yes. Lehman, no. Fannie Mae, yes. GM, maybe. Still at the heart of this mess, however, are troubled mortgages. The latest plan to help homeowners strikes a right note. It aims to restore a key and illusive factor in business contracts: trust.
Simply throwing taxpayer dollars at problems such as rising home foreclosures or sinking US automakers doesn't solve the fundamental issue that certain industries have suffered a breakdown of confidence over many years. Americans feel deeply betrayed.
Why should taxpayers, for instance, now trust GM, Ford, and Chrysler to make vehicles as consistently reliable and affordable as foreign competitors if they are handed billions? The evidence is not yet in. Simply "saving jobs" doesn't make sense if those jobs still make cars many buyers don't want.
The same is true for troubled mortgages. How can government help fix the broken bonds between lenders and borrowers? Money isn't the primary answer. There needs to be a renewed faith that both sides are now honest in their current assessment of a new mortgage deal.
Government is not very good at such assessments. Nor may be many bankruptcy judges, if Congress decides to let them renegotiate mortgages for debtors who are over their heads. This week's government rescue plan does, however, lay down some guidelines for financial institutions, starting with Fannie Mae and Freddie Mac, to follow in conducting "workouts" for mortgages that can be saved.
Homeowners, for example, who live in their homes and are 90 days delinquent would be eligible for new loans with a payment that does not exceed 38 percent of gross monthly income. Terms on interest and remaining principal could be extended to 40 years. Banks would be given $800 for the service costs.
The plan comes as three major banks – JP Morgan, Citibank, and Bank of America – have decided to renegotiate troubled mortgages they own. Such a move may have come under threat that a President Obama might force banks to swallow losses on mortgage principals. But nonetheless, the industry at least is moving to rework contracts in ways that are more responsible than during the easy-credit days of a few years ago.
A majority of the troubled mortgages remain owned by multiple investors who bought them as securities. The US Treasury still needs to find a way to untangle this legal morass in a way that also renews trust between worried borrowers and their lenders.
Former Harvard Business School professor Shoshana Zuboff says the business community must reinvent trust with consumers after decades of losing it. Writing in Business Week, she suggests "consumers will give their allegiance and cash to advocates who offer trustworthy relationships intended to support their complex needs rather than to distant adversaries who offer only impersonal transactions."
Even the language needs to change from the easy moniker of "bailout." Like a parent helping a teenager caught shoplifting, the rescue of a business lies less in saving it from harm and more in restoring relationships. And in business, trust is rebuilt one person at a time in the transaction of values – before any money changes hands.
