The Latest Mortgage Bailout Plans: Government to Buy Foreclosures?

Hillary Clinton is running on a political platform that says she wants to freeze all foreclosures for six months or longer. Some people laugh at the idea. But is it all that farfetched?

During the Great Depression, some states froze mortgages for up to 3 months- mainly to keep people calm.

And now a tipster has told me that the government is actually studying the feasibility of freezing foreclosures for as long as three years.

Yes- imagine it.

All of those investors getting to live in their overpriced condos for three years for relatively pennies on the dollar. Risk-free.

I don’t know any real details yet though. Maybe the government will someone exclude investment properties from the plan. So far, it’s just being “studied” as an option.

But even still- is freezing foreclosures for years a good idea? What do the banks do in the meantime? Who pays the taxes, assessments and who would keep up the home if they thought they would lose it in a year, or two, or three anyway?

Questions, questions.

Congressman Barney Frank (D) from Massachusetts will put up a new bailout plan today. Only a few details have emerged. From the New York Times:

Like other proposals floated by banks and regulators, Mr. Frank’s plan would have mortgage companies write down the value of loans to their current market price before they are refinanced and given F.H.A. backing. Participation would be voluntary, however.

Mr. Frank did not mention the prospect of the federal government’s purchasing home loans outright, according to a report by the Stanford Group, a research firm. Mr. Frank and his staff have considered loan purchases in the past, but the Bush administration opposes such an arrangement.

There have been rumors the past few days that Frank’s plan would offer up to $10 billion for the government to buy up foreclosures. Here is some of what has been circulating. From The Hill:

Senate Banking Committee Chairman Chris Dodd (D-Conn.) and House Financial Services panel Chairman Barney Frank (D-Mass.) would allow the government to purchase billions of dollars’ worth of mortgages at a discount — but only after lenders have agreed to write down their costs to reflect the loans’ true value. Under Frank’s plan, the loans would be refinanced for a subset of troubled borrowers and then resold to investors.

Writing in an op-ed that ran in The Washington Post on Sunday, Frank said that some might interpret his approach as “ ‘bailing out’ people who made mistakes.” But Frank said many of those people were “victims of unfair lending practices.”

Unfair lending practices? What happened to the moral hazard argument?

A bailout would help some of those preyed upon- no doubt. But it would certainly help many others who were caught up in the greed of the housing boom.

Why should I, as a fiscally responsible taxpayer, bail any of the investors out? Or those who bought too much house on their salaries?

It seems that many of these plans are going to put an enormous strain on government entities such as the FHA, which aren’t capable of handling this much debt.

Yes, the number of foreclosures is escalating. But it will hurt the system more to mess with it- then it will to simply let it work its way through the system. The downturn will last longer if the government gets involved to try and soften the blow or somehow blunt the pain.

Stay tuned.