4 Solutions To The Subprime Crisis

1. Tweak the bankruptcy code

Judges already have the power to shrink or vaporize many debts, like credit card balances and mortgages on investment properties. This idea, supported by Sens. Richard Durbin (D-Ill.) and Christopher Dodd (D-Conn.), would let judges reduce primary home loans as well.

The pros: The plan could save hundreds of thousands of people from foreclosure without costing taxpayers anything, say consumer advocates. And it's a minor change, so it could happen fast.

The cons: The Mortgage Bankers Association says its members would have to raise rates on all home loans by as much as 1.5 percentage points to compensate for the risk of court-imposed losses.

2. Introduce fixed-price housing

John H. Vogel, a real estate economist at Dartmouth College, has a plan he says cures both the mortgage market and housing affordability. He proposes that the government buy up the mortgages of troubled borrowers and give them smaller mortgages, reflecting the drop in real estate values. The catch: The price of those houses would be forever fixed at their new loan amount.

The pros: The program could produce as many as 2 million affordable homes. Of course, owners wouldn't be able to profit in future housing booms. But they'd get a house at below-market prices.

The cons: Living next to a house that never goes up in value could decrease the value of your house as well. Buying up all the houses from the banks could cost as much as $200 billion. (In time, much of that would get paid back by borrowers.)

3. Create a new financial instrument

The Office of Thrift Supervision (OTS) proposes creating negative amortization certificates (NACs). Say a bank agrees to write down a $250,000 mortgage to $200,000, relieving a borrower of $50,000 in debt. The government will then issue the lender NACs worth $50,000. When the homeowner sells, the first $50,000 in profit goes to repay the NAC. Anything above that, the seller keeps. If the home goes for less than $250,000, the bank gets all of the profits and the NAC disappears.

The pros: Banks would be more willing to cut borrowers a break because they would get an asset for doing so. Homeowners would get part of their debt relieved, a more affordable mortgage and the reduced risk of owing money when they sell the house.

The cons: If owners knew banks had first claims on profits, they'd have less incentive to renovate or maintain their homes. NACs would be hard to value - and the last thing we need is another hard-to-understand financial instrument.

4. An under-the-radar bailout

The Federal Reserve effectively buys up bad mortgage debt from banks (it has already started to do that by accepting impaired assets as collateral for loans to financial institutions). Struggling banks get cash from the government to keep them afloat.

The pros: Politicians could say they didn't bail anyone out even when they did. A cash infusion means banks could lend freely again. Mortgage rates should fall. That should bring more buyers into the market, slowing the drop in prices.

The cons: Taxpayers would foot the bill, which could run as high as $300 billion. Some borrowers could refinance, but many would lose their homes. That means more foreclosures. Real estate prices, while helped by cheaper financing, would probably still fall. But hey, score one for personal responsibility, making people bear the consequences of their mistakes - as long as they're homeowners and not financial executives.

Global Economy Crisis Brings World Finance Leaders Together

Financial leaders from around the world are converging on Washington for meetings of the International Monetary Fund (IMF) and the World Bank April 12-13 against the backdrop of growing concerns about the global economy.

Simon Johnson, IMF director of research, said the subprime mortgage housing crisis in the United States has brought economic growth in the world's largest economy nearly to a standstill. The U.S. economic turmoil, he added, has prompted the IMF to lower its projection for global growth in 2008 to 3.7 percent, well below its earlier prediction of 4.9 percent.

In addition, European Union member states that have adopted the euro currency are slowing to 1.4 percent projected growth rate in 2008. Johnson attributed the anemic growth rate to weakening external demand due to the U.S. downturn, a stronger euro, continued financial market strains and rising energy costs. He added that housing downturns have been a problem in some European countries.

Jaime Caruana, director of the IMF's Monetary and Capital Markets Department, said there has been a "collective failure" to appreciate the economic damage caused by the subprime crisis.

"The credit shock emanating from the U.S. subprime crisis is set to broaden amid a significant economic slowdown," Caruana said, briefing reporters April 8 about the coming IMF-World Bank meeting. "The deterioration in credit has moved up and across the credit spectrum to prime residential and commercial mortgage markets and to corporate credit markets. As the credit cycle turns, default rates are likely to rise across the board."

The economies of the emerging markets so far have not been affected severely by the subprime crisis because of improved policies, strong balance sheets and favorable macroeconomic conditions, according to Caruana. But he cautioned that the danger of contagion still was present. Caruana said the immediate challenge for policymakers as well as financial institutions is to contain and mitigate systemic risks and economic spillovers.

"The IMF is fully engaged in a wider effort by national authorities and international bodies to analyze and learn from the recent turmoil," Caruana said.

Johnson said many emerging and developing economies are threatened by inflation and the risk of becoming overheated. He said governments of emerging economies could ease pressure on food and energy prices by adopting more open trade policies in those areas.

In addition to offering analyses and policy recommendations on the global economy, the IMF and World Bank will address proposals for internal reform with the intention of giving emerging market countries and poorer countries greater say in running the IMF.

IMF Managing Director Dominique Strauss-Kahn said the IMF executive board favors a reform proposal for the IMF to adjust its structure to the "dynamic and changing realities of the global economy."

"We are creating a more flexible system ... which involves further changes over time as the relative positions of countries in the world economy evolve," he said.

The participants in the meeting will vote on a package of measures intended to set IMF finances on a sound long-term footing. The key element of the package is to sell 403.3 metric tons of gold from the IMF's gold holdings and establish an endowment with the profits.

Strauss-Kahn said the plan, if implemented, "will put the institution on solid financial footing and modernize the IMF's structure and operations."