The Obama administration "viewed foreclosures as an instrument of housing markets clearing," Damon Silvers says. "And they thought foreclosures were unavoidable, in order to maintain the fiction that these loans were worth what banks said on the balance sheet."
Silvers explains that only minimal taxpayer funds, far less than the total needed, were devoted to preventing foreclosures; banks never had to kick in their own share. "In order for the economy to be revived, we needed to write down the principal on these loans," he says. "The decision that was made amounted to debt peonage on U.S. families to the benefit of the banks."
Again, the problem here is related to existing laws.
Government forces the write down, the government then gets sued, the government is then forced to pay the cost of the principal write down.
The government will have to pay nearly the full cost of any principal reduction it mandates.
Obviously, this holds for Fannie and Freddie, because the government owns them. But it also holds for private banks. According to the expert I heard from "Contract interests are property for purposes of the Takings Clause." So the government can mandate that banks write the mortgages down. But eventually, a judge will order them to pay those banks back. Yes, they will, even if those banks are full of bad, irresponsible people who gambled with money that wasn't theirs.
So if the government took your approach instead of a 700bn bailout that would be replayed, you'd have a 750bn payment to lenders that would not be paid unless laws were changed.
Mind you the Takings Clause is in article V of the constitution so it wasn't going to be changed and would have likely handed Republicans the oval as well.
At the FDIC, Sheila Bair immediately saw this as an opportunity. "When robo-signing raised its ugly head, I sent a proposal to Tim [Geithner]," Bair says. "I called it a super-mod. Any loan that's more than 60 days delinquent, take it down to face value-just take it down. Write off that principal. And if they held onto the house and kept making their mortgage payment, any subsequent appreciation they would have had to share with the lenders. But just take it down."
I'm not sure if this would hold scrutiny, but it looks like she's suggesting homeowners be able to to have a temporary principal reduction and then be on the hook with lenders once their home appreciates value.
As it's worded I'm not sure how well it would hold up with court challenges nor the benifits considering people who were upside down and refinanced wouldn't began breaking back even until maybe 10 years.
The rest of the article pretty much shows dtate and federal enforcement limiting illegal activity by lenders.
CNN going for the deathblow on Young Bern. 3-1 handicap match! 