An Alternative Plan

By Mayor Mike Halfacre, Fair Haven, NJ

Let’s take a deep breath. The economy will survive. The Federal Government is here to help.

As a Republican, I subscribe to what Ronald Reagan said: “Republicans believe in people, Democrats believe in Government.” Therefore, I do not want to see another mass welfare program aimed at those defaulting on their mortgages.

As a Fiscal Conservative, I also do not want to see a massive government bailout of mortgage companies and Wall Street firms that, frankly, made their own bed.

However, as sometimes happens, Uncle Sam must get involved when the children don’t act in their own best interests. How to best intervene?

First, a simplification of why we are in this mess:

By most accounts, this mess was created by the sub-prime mortgage crisis. In other words, a tanking real estate market and slowing economy has combined to increase defaults, and those defaults have created a lot of bad paper. Many investment companies and mortgage companies have been pumping up their profits on the sales and re-sales, and re-re-sales of this bad paper for a number of years. When the paper goes bad, the foundations of all of those investments is shaken.

The companies that underwrote bad loans, and the companies that sold those loans as investments, do not deserve a Federal bailout.

Conversely, there are some sophisticated borrowers who worked the system to obtain mortgages and purchase investment properties that they otherwise shouldn’t have been allowed to purchase. These speculators do not deserve a Federal bailout.

However, many other Borrowers were simply doing what they were told they could do by the mortgage companies. They were told they could achieve the American Dream of home ownership, and they went for it. Often, they were approved for a mortgage when they shouldn’t have been, or were approved for a mortgage the terms of which would turn out to be too onerous for their financial circumstances.

While not all of these borrowers are in jeopardy, those who are deserve a bailout.

So here is my plan:

Spend some money to create a Federal Agency, of limited duration (Most agree that the shake out of the sub-prime loans will take place over the next few years) that will have the authority to accept applications from distressed borrowers to seek relief from foreclosure. Making application will “freeze” any foreclosure proceedings, while the application is pending, but not the borrower’s obligation to continue making payments. The application review process will be similar to an underwriting audit, and must be completed in a timely manner. The original application will go through a review, and if it should not have been approved, the agency will have the authority to examine the applicant’s current financial condition and provide mortgage payment assistance, not in cash to the applicant, but in subsidy paid directly to the mortgage holder.

If the original application would have been approved, and the pending default is due strictly to factors not related to the loose underwriting of sub-prime mortgages, the applicant is directed to the bankruptcy court for relief.

Along with this mortgage assistance, we need to ensure that this doesn’t happen in the future. Although underwriting has tightened up considerably, our existing regulatory agencies need to ensure that the underwriting process doesn’t loosen up again in the future. Those who forget history are condemned to repeat it.

We need to stop making this about giving something to everyone. We need to recognize that the economy will ebb and flow. It is cyclical, and nothing any government, or presidential candidate, can do to overcome it. But the government can take steps to soften the landing. By assisting those homeowners who were taken advantage of, the lenders will get most of their money back, and home ownership will continue to be at historically high levels.