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Paul Kiesel
Paul Kiesel
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Proposed Mortgage Bailout Plan Won’t Work

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Representative Barney Frank and Senator Chris Dodd have called for a housing relief plan that includes up to $300 billion in loan guarantees from the Federal Housing Administration. The money would be used by to refinance loans that homeowners can’t afford as long as the original lender reduces the principal on the loan to 85% of the home’s current market value.


Some are supporting the bill saying that borrowers would be absolved of mounting debt and original lenders would be better off financially than if the homes were to foreclose. The bill, if passed, would help prevent almost 1.5 million foreclosures and halt home-price declines since it would keep more houses off the declining housing market.


There are also many members of congress who find this bill to be disadvantageous, but mainly because they claim the government assumes the responsibility for reckless behavior in the subprime mortgage boom. However, other critics find faults with the bill for more practical and financial reasons.


Yale Economist Robert Shiller, as I pointed out a couple days ago, does not belief we’ve come back down from the housing bubble and the prices will continue to fall regardless. His theory is that since home prices shot up 85% in value from 1997 through 2006 (when adjusted with inflation), that eventually the prices will reach a more reasonable level; an equilibrium of sorts. He argues that if the government were to assume all of this risk (i.e. taxpayers), then what solution will be available when the FHA looks at a large portfolio of loans backed by houses worth less than the mortgage. There really isn’t a viable solution at that point. The government and the taxpayers will have to eat the loss, and that could make conditions in the financial market worse.


I do believe that the Dodd-Frank bill is estimable, and I know both men want to see borrowers who were cajoled into subprime loans helped out, but they need to examine other possibilities. Critics and backers of the Dodd-Frank bill do agree, however, that housing prices will continue to fall with or without the government playing the role of “doctor.” I might be in the minority, but the government should be playing the role of “Judge, Jury and Executioner” in regards to the lenders that propelled this crisis to begin with. Instead, members of the Bush Administration, particularly Henry Paulson, are despicably bailing out financial institutions, arguing that if the banks fail, then the whole mortgage and housing crisis could implode. Yet, it appears they do not realize that at any moment, once people realize their homes aren’t worth the loans and borrowers can no longer make payments, that the “jingling” noise coming in the mail will be a greater indicator of a mortgage meltdown transitioning precipitously into a mortgage implosion.