The Government’s Anemic Response to the Foreclosure Crisis

Posted on October 21, 2008
Filed Under Foreclosure Homes | Leave a Comment

It will not be far from the truth to say that the government’s anemic response to the foreclosure crisis is not going to stop a rerun of the dramatic events. The Hope for Homeowners that kicked off in July is too complex and limited. The latest $700 bail out plan makes whimpering pleas to the lenders and lacks in punch. So far efforts to bring the mortgage industry to book has been futile.

Recently Sheila Bair, the chairperson of FDIC openly differed from others in the Treasury as well as the Federal Reserve. She harshly criticized the Bush government for not doing sufficient for the house owners. Speaking to The Wall Street Journal she said, “We’re attacking it at the institution level as opposed to the borrower level, and it’s the borrowers defaulting.” This is resulting in the trouble at the level of the institutions. She suggested that the problem should be tackled at the borrower level.

There are plenty of ideas going around to do exactly that. But so far it has not gained wide support. Both McCain and Obama, the presidential candidates have plans to assist the house owner but each planis clumsy and would put further financial burden on the government.

The dean of Columbia University Graduate School of Business, Hubbard and his colleague Chris Mayer suggest that the government should enforce the negotiating of all primary residential house mortgages into 30 year fixed rate conventional mortgage with an interest of 5.25%. These mortgages should be placed with Fannie Mae and Freddie Mac.

John D. Geanakoplos, an economist from Yale came forward with another proposal. He proposed a new structure so as to modify the loans enabling the house owners to continue to stay in their homes. He also suggested that renters should be given incentives to purchase the units. This will create a floor for the real estate prices. Both these ideas are better than the proposals made by the two presidential candidates.

Daniel Alpert of Westwood Capital (modest investment bank) came forward with a really feasible plan. He suggested the passing of a law that would allow those with soured mortgages to surrender the deed to the lender but continue to stay in the houses they are occupying for another five years by paying rent as per current market rate. The law would make it mandatory for the lender to accept the arrangement. After five years the renter would have the option to buy the house at prevailing market value.

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