Sunday, February 22, 2009

The Mortgage Default Crisis: Some Possible Solutions

A significant component of the financial crisis in America has been caused by mortgage defaults. The primary purpose of a home has for years been forgotten. A home should be a place to live. Millions of Americans have become serfs to the banks, becoming enslaved to the roofs over their heads. A house became an oversized credit card. The higher the paper value of a dwelling, the more can be borrowed against it. Many people were maxed out not against their credit cards but against their homes.

In some markets such as New York City, the number of individuals and families who despaired of home ownership continued to swell as homes once built for working people instead became investment instruments.

In the face of this dreary picture, it would seem dismissive to call this a "market correction." In a real sense, however, reality has to kick in. Homes are for people. When food and clothing is priced beyond the reach of the consumer, adjustments must be made. This is no less true for homes.

Millions of homes are going into foreclosure. Others are on the edge. People are afraid to sell their homes for fear of what they might lose. There are solutions. I propose the following.
1) If someone loses money selling their home, they should be able to pay a percentage of their tax bill to the Federal government with a credit given for the loss.

2) Banks should be given incentives to offer low interest mortgages that are based on real and verified income. These should be loans that are designed to fit into a modest budget and not turn the home owners into serfs.
3) Banks should be allowed to write their losses off on renegotiated mortgages over a period of years. The percentage should give them relief without shutting off the flow of tax revenues.
4) A greater break on taxes should be given for renegotiated mortgages than those that were foreclosed.
5) Homeowners who managed their mortgages responsibly should also get a tax credit for doing so.

Homes from which the occupants are evicted produce no revenue for the banks and none for the government. Anything that keeps the flow of money going is a step in the right direction. The taxes levied by the government are a significant facet of the investment climate. Whenever possible, the government should foster investment and reward positive behavior rather than extract money through taxation or printing the money outright.

It is an open secret that people lied to get mortgages. The banks that extended the mortgages were also party to the deceit. There are ways to verify financial information. Some lenders invited deception. I saw too many posters that advertised "NO INCOME VERIFICATION".

Bernard Madoff has become a poster boy for scam artists. There are a lot more out there. And there are millions of loans built on deception and made on the strength of embroidered truth as well as outright lies. We are in the midst of a national reckoning as we attempt to rebuild our economy on solid and truthful foundations.

We have an opportunity to extract much good from the current crisis. I do not see any movement in that direction. I am a small voice in the vast expanse of the internet with some simple ideas. I hope that truth is contagious

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