We Are Doing It All Wrong!

Why are we buying up trillions of dollars of toxic mortgage assets that we know they are going to fail when with a far smaller investment we could be saving homeowners and converting much of this toxic debt into refinanced investment grade paper? Our current approach seems to be illogical.

Millions of homeowners are being forced into foreclosure. These are individuals who will have their credit ratings ruined and who for the next 7 years will by necessity become renters (or will move in with relatives or worse become homeless). Thus we are seeing a permanent reduction to the demand side for housing at a time when we have a huge surplus of housing stock.

The alternative is to develop policies that will permit homeowners to keep their homes and protect their credit ratings. If a homeowner faces foreclosure because he/she can pay only, say 80% of his/her monthly mortgage, does it not make more sense to keep this 80% cash flow contributing towards the servicing of mortgage debt and finding some means to cover the remaining 20% until the homeowner has the where with all to return to self-sufficiency? Isn't this better public policy than to have the government buy their bad mortgages knowing full well that this debt will be worthless and its costs will ultimately land on the doorstep of either the taxpayer or the middle class in the form of a debased currency and lower living standards? Why are we so quick to look askance at the moral hazards of "too big to fail" banks, but yet we dig in our heels to enforce moral hazard risks against individual homeowners? Simply, we are doing it all wrong.

There are many ways that we can assist the individual homeowner and lessen the moral hazard risk. Perhaps we can take a public equity interest in the value of a home that is refinanced. Home prices will eventually appreciate again and mortgage principal balances decline over time thereby freeing up equity for eventual repayment. If the Federal Reserve is comfortable with subsidizing zero interest rates to banks, perhaps it should find greater comfort with subsidizing home mortgage interest rates to homeowners. Perhaps through a 5/30 variable/fixed product that reduces cash flow requirements of individual homeowners while they get back on their feet.

Obviously this is not a cure all. Millions of fraudulent mortgage loans were sold where the purchaser never intended to repay and the financers didn't care because the loans were packaged and sold to unsuspecting third party investors such as pension funds and foreign institutions. This fraud will burden our economy for decades to come and there is not much that we can do about it but learn and put into place the proper system of controls that will prevent future occurrences while not stifling our market based economy.

While everyone can share in the blame and greed that has gotten us to where we are today, it is not appropriate to place the preponderance of blame on the individual homeowner who was plastered with offers to refinance and take out home equity loans and who succumbed to these enticements. Who were the smart suits in the room who purportedly best understood the loan risks? Who were the ones who exerted pressure down through the financial system to continue to generate more and more mortgages that could then be profitably securitized? Who advocated for the use of subprime loans, no documentation "liar" loans, interest only loans, reverse amortization loans in order to keep the product flowing regardless of risks? Who influenced our governmental officials to deregulate and allow investment banks to leverage to irrational multiples? Who engineered the complex, high-risk financial products and off the books accounting schemes and special purpose vehicles? Who cajoled and essentially bribed the rating agencies into developing and then keeping unrealistic rating models even after the true risks became apparent? Who simply bought "insurance protection" in order to continue to perpetuate the failing model rather than self-regulate once the risks became apparent? Who secured governmental bailouts in order to keep their business as usual and their bonuses flowing even after the financial markets collapsed? Who manipulated the commercial banking regulations and secured exemptions to continue risky banking practices in the midst of the worst financial crisis this nation has perhaps ever seen? Who pressured the accounting standards board to rescind mark to market valuations thereby permitting the reporting of higher profits and providing cover for continued excessive bonuses and compensation schemes?

So I ask again, why are our governmental officials so keen on bailing out the banks and yet we will not bail out the homeowners when the total cost to our economy would be so much less and the benefits to the individuals who make up our society would be so far greater?

Education appears to be paramount as most people strongly oppose “bailing out” the homeowners while they do not object as much to buying the toxic debt simply because it is too complicated for them to understand. Rather than try to explain the true circumstances of our current economic and financial crisis and the best options going forward, our leadership instead are taking the path of least resistance and our politicians are ensuring that they do not "bite the hands" that continuously feed their need for campaign funding and personal gains and perquisites that they rationalize they are entitled to due to their positions of power. How many politicians do you suppose have received sweetheart mortgage loans or have had some kind benefactor acquire their property for a really good price over the years? Aren't these people now somewhat compromised - just as their benefactors had intended them to be?

I am not very optimistic that reason will prevail. Corruption on the other hand is likely to continue unabated.