Geithner’s Plan and the New Reality of Shanty Towns

Treasury Secretary Timothy Geithner is back in the spotlight today. He’s scheduled to testify on Capitol Hill about his new plan for the government to greatly expand its oversight of the financial industry, included hedge funds. Geithner, of course, has been in the news a lot lately, as debate continues over his other plan, the one in which the government gives generous subsidies to investors to buy toxic assets from banks.

However, missing from the larger debate is the reality that a toxic asset — essentially, a piece of paper — wasn’t created out of thin air. This crisis started because of housing, and while that toxic asset may have been sliced and diced and sold around the globe — somewhere there’s still a house, with a mortgage, and maybe a family in distress, at the root of it.

Those foreclosed houses are driving down property values, creating neighborhood blight, and are piling up around the country. If you’ve got to live in a distressed neighborhood, a tent city, or a shanty town, what does the Geithner plan mean to you? I don’t know that answer, so I checked around with some of the housing experts I regularly talk to. Many didn’t reply right away, as they digested the Geithner plan, and some are still thinking about it.

But here’s Alan Mallach, a senior fellow at the National Housing Institute and the Brookings Institution. Mallach is the one who pointed out to TWI that in the Treasury Department’s view, they are dealing with paper, not people’s lives or neighborhoods. That holds true for Geither’s plan as well, Mallach wrote in an email. I had asked him whether Geithner’s plan makes much difference to people at the bottom.

From Mallach:

As far as I can tell, unless I am missing something, the short answer is no, period. Some investors may be better than the banks, but some may be worse – also, if they are buying bank shares in mortgage-backed securities, rather than whole loans or 100% of the security, the investor will have no ability to modify the servicer contract already in place, or to influence the outcome – in the absence of a federal cudgel.

Don’t expect Geithner to take any questions about this today. When the stock market reacted well to the toxic asset idea, Geithner’s own stock rose. It’s also  true that the Treasury Department and the Obama administration also have unveiled a housing rescue plan – but it doesn’t directly address bank-owned REOs or tackle the problem of vacant properties piling up.

The fact that housing is at the root of this crisis seems to be getting lost in the headlines, in the politics, and in the details of Geithner’s latest moves.

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