Fixing the Mortgage Mess

I'm not very optimistic about fixing the mortgage mess. It looks like no one has any really good ideas and the politicians are not willing to accept the reality than the pre-bust housing market was artificially created by easy credit, speculation and a whole transaction fee industry willing to pass the problem on to the next guy. For the foreseeable future the housing market will be smaller, slower and more conservative.

Early experience with private workouts is not very encouraging. It appears a large number of people who get workouts soon fall behind again and eventually end up in foreclosure anyway. Not long ago the president of a local bank was on the radio expressing his concern that five states are causing most of the problem and that even there traditional fixed rate mortgages were very stable.

Republicans seem stuck on the "Moral Hazard". It also seems to be the basis of most of the opposition. No one wants bad or reckless actors to benefit from their own reckless actions.

Democrats seem stuck on giving something to anyone to save everyone. If you want to give me some money to help my neighbor, I'm ready to take it.

I have a suggestion (actually two).

First, instead of offering to simply "keep people in their homes" by letting someone else pay for part of their house, how about offering to sell people in trouble a house, but require they buy a house they can actually afford. The government then has a house it can sell to someone else, possibly at a loss but at least there will be activity in the market and no one gets something for nothing.

As an alternate, I suggest establishing government insured shared equity mortgages, and converting as many loans as practical to this type of loan. This way the government has a method of recouping at least some of our money they spend by capturing it when the house is sold in better times. The potential appreciation of the underlying asset will allow the government to eventually sell the mortgage to recoup at least some of our money sooner.

In both of these instances you avoid a large part of the Moral Hazard because the people getting help have given up something of value for that help without wrecking their lives. Hopefully learning something in the process.