Wednesday, January 21, 2009


How to fix the mortgage crisis

Recriminations are ineffective when looking for solutions. Remembering and being watchful are warranted when forging forward though this morass of insolvent debtors.

Too big to fail comes to mind as a warning call that too few are controlling too much, to the detriment of many. These huge ‘lending institutions’ should be disbanded in favor of regional banks. The business model of selling mortgage derivatives and living off the commissions is a failure because it produces nothing.

Mortgage securities bundled and sold make the process of lending into a commodity.

Solve the foreclosure crisis by identifying all the foreclosures in any given area X, assign foreclosures to regional banks located in area X, subsidize new loans to qualified buyers or forclosees for the properties, and the regional banks holding the new mortgages will also manage the collections for these mortgages. Close the books for a percentage return on the subsidy, shared with the bank until the subsidy is paid.

Of course, the powers that be will fiercely defend mortgage derivatives as a logical outgrowth of the old mortgage business that made money by collecting interest on loans made and collected locally. The mortgage business evolved to make land more valuable and to enable citizens to buy land. The mortgage business provides for a need in our society, and should not become a pawn in an easy money policy that enables profit taking and debt spawning for nothing produced.

My suggestion is that mortgage derivatives be outlawed and any instrument using them be declared invalid due to the outlandish methods used to assemble these bundles. Arrests are imminent and I see these bundles are illegal, beginning with the original properties sold to unqualified buyers, inflated appraisals based on a developer-lender-appraiser monopolies, bundled securities given unresearched bogus high ratings by more appraisers, insiders at the SEC turning their heads, fund managers on the lam and no doubt more illegal possibilities.

If foreign governments are holding these bogus derivatives, they bought an illegal ‘product’. Using the generation of mortgages as a commodity is a failed business model that should be outlawed. We need to take care of our own people and handle this real estate overproduction and overpricing in our communities. Work with regional banks, regional foreclosures and regional management of mortgages. Allow the real estate prices to drop until people can afford to buy.

Forget bailing out these huge lenders. Clean the temple of the moneylenders and allow a new regional based banking system to resurface. Too big to fail might really mean too big to succeed.