First, we need to bring back confidence in our financial institutions. Simply making sure that they continue to exist isn’t that helpful if they aren’t doing their jobs. That means they have to be lending money out to people who can afford it and collecting that money accordingly. In order to make sure they are doing their job we absolutely must at a minimum bring back the old regulations by repealing Phil Gramm’s (architect of McCain’s economic policy) deregulation bill. Creating a few new regulations might be useful as well, as long as they prevent this kind of mindless money grab.
However, that is nowhere near enough. We should also have the FDIC and SEC swoop in on banks and mortgage companies after closing on some Fridays for unscheduled audits that would take the entire weekend. Go over these institutions completely and with a fine-toothed comb. Then on the following Monday morning if the company doesn’t pass the audit, the government takes them over. If they do, then the FDIC or SEC should make a nice, loud public statement that the company is financially sound and ready to continue business.
That helps bring back confidence in our financial institutions, but doesn’t help the real backbone of our economy. In order to fix that, we’re going to have to relieve the homeowners of some of their burden. This is going to be hard and involved. My recommendation is to do something similar to the audit of the banks themselves. We’re going to have to freeze foreclosures for a time. Before foreclosing on a property, a financial institution will have to do the following: Attempt to contact the homeowner and offer to meet with them. This should be first attempted through the mail, followed by phone calls, and then home visits if necessary. The mortgage companies would not be able to foreclose on the property if they couldn’t prove that they had done this. If the homeowner agrees to a meeting, then they would meet at a neutral location with the mortgage company and a neutral mediator.
At the meeting, the mortgage company would have to present an honest assessment of the current value of the property, as well as the amount owed on the property. The homeowner would present documents showing their income as well as their financial liabilities. It is likely in many cases that the homeowner would not be able to pay back the entire amount of the loan. It’s probable that in many areas the home could not be sold for more than the loan amount for a decade or more. The mortgage company is going to have to take a loss in these cases. But, we can mitigate the loss if we’re careful. The loan must be restructured so that the payments are affordable and not for less than the reassessed value of the property, but if the homeowner sells for more than the loan’s restructured value for up to some specified time (I would say up to 10 years after the life of the loan would be reasonable), the mortgage company should be entitled to a portion (not most or all) of the profits up to the original value of the loan. This money going to the mortgage company would be used to offset any bailout funds given to the mortgage company by the government, and buy back shares in the company from the government, helping to keep shareholder equity. Any financial institution unwilling to do this should be excluded from bailout funds.
This idea has the merit of helping to free up funds for the homeowners to spend or invest and keep our economy afloat, while protecting shareholder value. However, in order for this plan to work it will have to be heavily promoted. It will do nothing if people don’t know about it. Is this idea perfect? No, it doesn’t really punish those who were greedy enough to get us in this mess. Is it simple? No, but the simple solution was to prevent this problem in the first place (and it was clearly preventable.) However, it is the best we can probably do at this point, and it would probably be enough to prevent a serious recession.
Anyone in Congress who wants to steal this idea and elaborate on it is very much welcome to do so.
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