Finding a Lost Key: The States Consider a Housing Remedy Washington Should Have Embraced Four Years Ago

“Many people said that the government should use the authority of eminent domain to seize the mortgages. The Obama Administration, heavily influenced by the bankerly types at Treasury, balked. The main reason, doubtless, was the failure properly to assess the gravity of the crisis. But, whatever the reason, Obama’s decision was the biggest mistake of his presidency, one that condemned millions to avoidable home foreclosure and the country to an economic tailspin.” Sanford Rose

Dolors & Sense

by Sanford Rose

KISSIMMEE Florida—(Weekly Hubris)—7/16/2012—Let’s review: This rolling recession is the handiwork of government.

The central bank committed two errors: First, it kept short-term rates too low too long in the aftermath of the 2001 recession; Second, it failed to use its statutory authority under the Home Owners Equity Protection Act to stem the upsurge of predatory housing lending that resulted from Error Number One.

Those are the basics. Everything else, including bankers’ cupidity and the proliferation of opaque derivative securities, is icing on the cake.

Of course, the central bank denies committing Error Number One. It asserts that there were many countries with the same monetary policy as the USA that did not have housing excrescences—e.g., Canada. Why was Canada immune? The central bank readily retorts that Canada has tough bank regulation.

It seems that government’s efforts to exculpate itself from Error Number One succeed only in  further implicating it in Error Number Two.

Having caused the hard times, government had a responsibility to end them.

It didn’t exercise that responsibility.

What the central bank caused, it could not by itself end.  (Actually, it could have by a daring and perhaps suicidal use of its legal authority to do virtually anything with the nation’s credit under “exigent” circumstances.) The bank sought the cooperation of both Congress and the Executive Branch. It got Congressional authority in the form of TARP. But that authority was misused by the Treasury.

In 2008, Rep. Barney Frank (D-Mass) wanted to get hold of those sinking mortgages in order to rip them up and write more affordable terms for home owners. Treasury said it couldn’t be done. Of course it could have been (http://frank.house.gov/).

Many people said that the government should use the authority of eminent domain to seize the mortgages. The Obama Administration, heavily influenced by the bankerly types at Treasury, balked.

The main reason, doubtless, was the failure properly to assess the gravity of the crisis. But, whatever the reason, Obama’s decision was the biggest mistake of his presidency, one that condemned millions to avoidable home foreclosure and the country to an economic tailspin.

Now, almost four years later, the idea is being refloated not by the federal government but by state and municipal authorities. Under one plan, the local authorities would seize underwater mortgages on which the borrower was nonetheless current and pay their banker/ investor owners an amount somewhat less than their current market values. The money to make these payments would come from other private investors who would be required to re-mortgage existing home owners at just about market values.

Thus, by allowing new private investors to make a comparatively modest spread, earned essentially at the expense of the old investors, government would not be required to make any additional budgetary outlays, while home owners would get substantially reduced monthly payments on previously over-mortgaged properties—a circumstance which would of course avert a slew of potential additional price-depressing strategic defaults.

The idea has much merit. It could not have been tried in quite the same form four years ago. But eminent domain was indeed the key to avoiding a deep recession and its concomitant hardship. We have lost the main chance, but some surviving home owners can still be succored.