Mortgage Meltdown: It’s the People, Stupid. Stop the Defaults!

Perusing Credit Suisse’s latest proposal on Capital Hill, which expands Federal guarantees on mortgages, there is good news and bad news. Good that the severity of the problem is becoming more apparent to those with their fingers on the levers of power. Good also that Credit Suisse, while obviously seeking to protect itself, has at least addressed the issue of turning back the decline in the housing market. Good also that their assumption is that it is possible to turn back the decline. Bad that the assumption is still that foreclosures are going to proceed at a rapid clip.

Foreclosures on primary residences should not proceed, period. Political questions of who should qualify and who shouldn’t based upon political ideology should be put aside for the moment. There is no time to carve out language that satisfies a political consitutency. The housing market is in dire trouble and the threat to to the security of the nation is clear and present.

At this point the extremity of the situation makes the analysis increasingly simple and separate from politics: The cost of foreclosure and evictions to the economy and the taxpayers (and incidentally Credit Suisse), vastly exceeds the cost of keeping people in their homes, for the time being, at all costs. This obvious number crunching fact is evading the geniuses at Credit Suisse and all the other players.

They are assuming they can’t actually stop the foreclosures. Yes they can. They are factoring in a vast number of evictions becasue they are “inevitable.” Wrong again. Of course these points elude the geniuses who came up with the scheme that got us into this mess. The reason is that they are (1) crunching the wrong numbers and (2) not taking a broad enough view of the marketplace.

It is in the interest of every party effected to stop the foreclosures and evictions. The details of the workout are practically irrelevant except to say that the borrower must be convinced to stay put. At this point, any successful plan must include incentives for borrowers to reaffirm, modify or negotiate their payments and stay in the house they purchased. It might even apply to homes purchased speculatively at this point, although I admit that is a push too far for most people to accept. If you look at the economy as a whole and ask “what would be the best result if we had total control?” the answer is obvious — no defaults.

Remove defaults and the entire problem goes away. There is no time for political debate. Either this premise is accepted and acted upon right now or the worst case scenario IS inevitable. remove de faults and there are no write-offs. In fact, some of the write-offs can be recovered. Put a plan in place that contains incentives for EVERYONE (including government) to share the burden, and you have a working plan. The basic flaw of every plan proposed so far by anyone is that it focuses on one group or sector. That is no plan. It is an escape hatch that will allow the proponents to jump from the frying pan into the fire.

The ONLY plan is one which provides adequate incentives to all players —- borrowers, lenders, closing agents, mortgage brokers, lawyers, accountants, investment bankers, securities brokers, investors, fund managers, rating agencies and bond insurors. The plan does not need to be perfect to work. In order for it to START working it must first keep people in their homes.

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