Help the Victim or Punish the Thief? Housing Solutions Get It Mostly Wrong

Foreclosure Aid Hinges on Eligibility, How Many Are Helped

By Lori Montgomery
Washington Post Staff Writer
Wednesday, April 16, 2008; D01
Should the federal government bail out a homeowner who lied about her income, bought a house far bigger than she could afford and now, predictably, cannot make the payments?
Probably not. But the better question might be whether the federal government should indict mortgage companies whose salesmen offered ‘liar loans‘ in order to make a buck. E-mails boast about liar loans, bringing a new lexicon to the conservative old banking industry.

What about someone with a terrible credit record who has repeatedly missed mortgage payments? Should the government agree to pay off the lender if that mortgage fails?

What? People with ‘terrible credit records‘ somehow got mortgages? Oh, tell me it isn’t so. You mean mortgage banks, investment banks, bond rating companies and hedge funds actually profited off such a bad choice of mortgagee? And they have yet to justify that before a jury?

The Bush administration says no, which is one reason the White House opposes an ambitious Democratic plan to defuse the nation’s housing crisis by sharply relaxing eligibility standards for federal mortgage insurance.

I happen to agree, but it’s a selective choice in favor of foreclosure. The White House had not the slightest problem with relaxing eligibility standards behind sub-prime mortgages. Alan Greenspan, in his wisdom, gave them his stamp of approval.

Under the proposal, lenders would be encouraged to wipe out a portion of the debt on troubled loans in exchange for a promise that the government would pay off the mortgage if the borrower can’t.

The White House will not approve any agreement that ‘wipes out‘ debt at the expense of investors. Investors are sacrosanct, may not be irritated or or meddled withbrought to bear the costs of fraud parading as a AAA investment.

“It’s going to be extremely difficult to reach a large portion of these borrowers,” said Meg Burns, director of Single Family Program Development for the Federal Housing Administration. “Unless you transfer the risk and cost to the federal government, then they cannot be helped.”

And the hard truth is that they should not be helped. It is not the business of government (in this case the American taxpayer) to bail out bad choices, whether they be by homeowners or Bear Stearns. It is the business of government to enforce the laws of the country; to put the approvers of liar loans, the fraudulent AAA raters of junk bonds, the packaging investment bankers and the knowingly deceitful hedge-fund managers in jail.

Whatever the numbers, the Frank plan is gaining momentum in Washington because it represents the best idea so far for dealing with a problem at the heart of the mortgage meltdown.

Wrong. That’s exactly as wrong-headded as if the government had ‘dealt with the problem at the heart of the Enron crisis’ by bailing out investors and giving Kenneth Lay another chance at running the company.

The administration and Federal Reserve Chairman Ben S. Bernanke have urged banks to write down loans voluntarily, but reductions in principal remain rare. So, in late February, Frank suggested a far more aggressive role for the FHA, the government’s mortgage insurance provider.

The banks stamped their little tassel-loafered feet like children and said ‘no.’ So Barney Frank is going to bail them out with your and my tax money, just as Bernanke bailed out Bear Stearns with printed money (same thing, only more obscure).

Leave them to the idiocy of their decisions. Banks unwilling to voluntarily write down will foreclose on abandoned, ransacked, looted and (in some cases) burned down properties. Let them see if they prefer that to the choices available:

  • Continuing their initial interest rates, while forgiving prior missed payments
  • Allowing owners to sell at market prices, turning over proceeds and avoiding additional liability
  • Allowing cities and towns to create municipal bond structures to buy out and re-sell (at greatly reduced prices) troubled home loans before abandonment and looting

Each of these solutions hurts investors. But the fact is that in bubble-markets, investors get hurt and that is part of the game. In this case, investors were themselves the victims of widespread fraud. They should be able to sue for that fraud and send the perpetrators to jail.

Meanwhile, housing will be found to be as spoilable a commodity as meat in a freezer with the plug pulled. Massive losses and the degradation of whole sections of American cities and villages are at stake, while everyone in government tries to make well the very people who pulled this rug from under our country.

A breach of homeland security in which the terrorists are on Wall Street.

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