The sub-prime meltdown has led to a lot of financial problems.  These cover the gamut from individuals, investors, financial institutions, builders, contractors, even governments.  The expected fix has been proposed - that of letting the government bail people out who have gotten into trouble.

This gives me serious heartburn.  I am among a significant - probably majority - of the country who believes that people should pay a price for their mistakes.  Why should people who were irresponsible - and I include lenders and other guilty parties as well as the borrowers - essentially get rewarded for bad behavior?

At the same time, with no intervention, there is going to be a lot of pain to be shared around.  And it will not be felt only by the irresponsible.  Those of us who find ourselves needing to sell our homes in the next couple of years are going to take a hit.  Depending on what bail-out programs are put into place the pain may be felt for five to ten years.

So what kind of compromise is available?  What mitigates the problems while still demanding sacrifice on the part of those responsible?  What can be done that will leave enough of sting to teach a lesson while not having serious repercussions that have worse unintended consequences?

A Hard Lesson

I think what needs to be done here is to teach a hard lesson to as many parties involved as possible.  This means that it will have to be a multi-pronged approach.  One part will have to penalize irresponsible lenders.  Another will have to soften the blow to the borrowers, without eliminating it.  The final part will be to penalize the supporting cast of players who made it all possible.

This is my proposal:

Congress shall create a limited life federally chartered corporation who will purchase troubled loans from financial institutions - the Federal Housing Preservation Corporation (FHPC).  These loans will be purchased at the face NPV (net present value).  The institutions selling the loans will in turn offer financing at 0% interest for 80% of the NPV to FHPC.

FHPC will modify the terms of the loans it purchases to limit the annual increases in mortgage payments to the 3-5% range to help borrowers stay in their homes.  All profit from this arrangement will return to the federal government to be used for reduction of the National Debt.

FHPC will have a set lifetime of 30 years, can acquire new assets for only the first 5 years of its life, and will sell off any remaining assets at public auction at the end of its federally mandated lifetime.

The third prong of the approach is to ask that Congress create another limited time organization to investigate the brokers, lenders, appraisers, and real estate professionals who contributed to the creation of this mess.  This commission will have the power to subpeona people and documents and to refer cases to federal or state jurisdictions as appropriate for any criminal activities discovered.  To limit the power of this commission, it should only be empowered to investigate residential real-estate transactions for the past 5 years.

The Results

This should have the desired results.   Financial institutions in trouble because of the number of bad loans have a way out that will give them cash to meet immediate obligations.  They may even lose less money than expected from the bad loans.  However, they will not be able to make any additional profit off loans that are 'saved'.  They stay solvent but make less profit than expected when they created the risky loans.

Borrowers will have an easier time staying in their homes, although the worst cases will still be brought into foreclosure.  At the same time, they will still face increasing payments and potentially higher overall outlays than if they had bought what they could afford.

The government, though involved with setting up a bailout program and putting money up front, has the possibility to break even or even profit from having to become involved.  With any proceeds aimed at debt reduction and limited life for the corporation managing this program, this is everything that can be done to minimize the impact (in terms of taxes or increases in national debt) on the rest of us.

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