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Friday, April 4, 2008

My Socialist Solution to the Mortgage Crisis

Introduction: In no way do I endorse the plan that I am about to propose. I have developed this plan as nothing more than a thought experiment in response to the quasi socialist solutions I have heard so far. The reason I am putting forth this plan is so that folks can see just how much government interference it will take in order for all of these so called bailouts to be effective and make sure that when the government loans money to these same distressed borrowers it will be paid back.

Barney Frank recently came out with his own proposal to combat the mortgage crisis, and here are some relevant parts.

Mr. Frank's idea is that, for mortgages originated between the start of 2005 and mid-2007, a lender and borrower would be able to agree on a federal refinancing plan. Lenders would have to write down their loan to no more than 85% of the current appraised value of the property – which means the banks will use this opportunity to unload the biggest stinkers in their loan portfolios.

For the borrower, the deal is even sweeter: a low fixed monthly payment and a reduction in the principal to market value. The Federal Housing Administration would then guarantee the loan, up to a total of $300 billion in total Frank Refis. The deal is so sweet that even Mr. Frank is concerned that otherwise reliable borrowers may "purposely default" to be eligible for assistance. His solution is to require borrowers to "certify" that they really, truly aren't doing this simply to get on the taxpayer gravy train.

Frank's idea is similar though more aggressive to most of the bailout proposals. I have three major problems with his proposal and others like it: first, it rewards bad behavior, second, it encourages good borrowers to go bad and get rewarded, and third, it gives a great deal to undeserving borrowers with no strings attached (as such I firmly believe most of these borrowers would then run up other bills and creditors and put themselves right back in this position)

Now, the reason that these proposals have these three significant flaws is because they are trying to go through the motions in a socialist solution. See, that isn't going to work. If you are going to resolve the mortgage crisis through socialism, then it needs to be done all the way.

Now, let's take care of some details. The plan that Barney Frank and others want to instill is a boon for any troubled borrower. Frank not only wants to artificially lower rates but to artificially lower loan amounts, and he wants to do it for folks did nothing to deserve any of these perks. If this is going to work, then these proposals must be combined with a plethora of government oversight to make sure these borrowers don't merely take advantage of these loans and run up new debt.

First, these loans would need to mandate that all borrowers sign up for direct deposit of their mortgage payment from their bank into the treasury on the first of each month. If any payment bounces, the borrower would need to contact the Feds by the fifth or have all their bank accounts frozen. Second, the borrowers would be forbidden from getting any new credit for the duration of the loan: no more cars, credit cards, computers, etc. Third, a government sponsored counselor would need to meet with these borrowers once a month to go over their monthly budget. Any purchase over $500 would have to be approved by the counselor. These borrowers made bad financial decisions and thus if the government is going to ensure the loans are paid back then they must also make sure these borrowers learn how to make good financial decisions. (Keep in mind there are well over one million folks that worked in real estate that are looking for new work and they would make perfect candidates for these government counselors.)

If you are thinking these measures are harsh, increase the size of government, and reduce freedom, then I totally agree. This plan is meant only to resolve the three issues I have a problem with. Remember, these folks are getting the financial deal of a lifetime. If they want this deal, they must then comply with the demands of the new creditor, the government. Instead of being rewarded with a great new payment, they are punished with most of their freedoms taken away. Good borrowers would no longer have any incentive to go bad on their loans, and of course, the government would guarantee that nearly every single loan would be paid back.

Now, no politician would ever endorse such a plan and that's because its naked socialism and punishment of borrowers would not go over well with the electorate. Yet, this is the only way to ensure that the government will be paid back. The government would like to make billions of dollars worth of loans to borrowers with a history of not paying loans back and they don't want to take the care to put into place the mechanisms to make sure they are paid back. In other words, the government is now doing exactly what they accuse the banks of doing to get into this mess. By instituting my proposals, the government would ensure that their loan commitments would be paid back. That, ultimately, is the most important thing to any creditor, and yet that is a responsibility the government is not taking seriously in proposing bailouts.

That is the rub. In order for these so called bailouts to turn into anything but an unmitigated disaster it would require an unprecedented centralization of power. As such, the reality is that any and all bailouts are doomed to failure.

1 comment:

Jack McHugh said...

I like the "socialist" solution of Holman Jenkins at the WSJ. He says if we're gonna do socialism, then let the feds buy up foreclosed mcmansions in the handful of regions that are the locus of the really deep trouble, and tear them down.

"Knocking down surplus homes would be the most efficient and equitable way to spend taxpayer dollars. It can proceed experimentally. It can be turned off quickly when the need evaporates. It would not be a lesson to Americans that housing debt is not real debt and need not be repaid. It wouldn't benefit the most irresponsible lenders and borrowers at the expense of responsible ones. The housing market would still have to hit bottom, but the bottom would be higher (and sooner)."

:big grin: