Legacy Loans

May 19, 2009

dictionaryWhat does legacy loan mean?

"Legacy loan" is a new term for adjustable-rate mortgages made during the recent housing bubble. Such loans stimulate exorbitant lending by offering homeowners short term “interest-only” or “minimum-only” payment options. Unfortunately, these rates readjust after only a few years to much higher levels, leaving many homeowners in the red and debt holders without payment.

What’s the significance?

Legacy loans are a main focus of the Geithner Plan for stimulating credit markets. Due to the increased default rate on legacy loans, their securitized value in the debt market has decreased drastically, and anyone holding such debt is incurring huge write downs. The list of debt holders includes major financial institutions that are now at risk of insolvency and thus unable to continue lending. The Geithner Plan attempts to lift these legacy loans and assets off the balance sheets of major banks so that they can again facilitate the flow of credit.

Who’s talking about it?

Economist blogger Brad Delong defends the plan for legacy loans and assets as an excellent scheme that lets the taxpayer come out on top … Paul Krugman argues the plan is doomed to fail because it does not recognize that legacy loans make the financial system fundamentally unsound…Willem Buiter believes the size of the plan is not large enough relative to size of legacy debt.

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