SUBPRIME LOAN DISASTER FOSTERED BY SUBPRIME POLITICS

NICHOLAS BAGLEY, SLATE - As the federal government scurries to prevent the subprime mortgage crisis from sending the economy into a deep recession, many of us are asking why it waited so long to intervene. As it turns out, the government wasn't exactly sitting on its hands. Instead, for reasons that now appear hopelessly shortsighted, an obscure federal agency torpedoed legislation from a handful of states that would have made institutional investors far charier of buying mortgage loans that were likely to go belly-up. If the legislation had been permitted to go into effect, the crisis we now face would probably look a lot less grim. . .

WHAT TO DO ABOUT IT

JEREMY GRANT, FINANCIAL TIMES - Christopher Dodd, the Senate banking committee chairman, insisted that any economic stimulus package for the US must go beyond short-term measures, proposing a new $10bn-$20bn fund that would buy outstanding mortgages at steep discounts to help distressed homeowners.

Laying out what he called a "very ambitious agenda" for the committee this year, the Connecticut Democrat suggested that any package should also include $10bn to allow local governments to buy foreclosed homes and resell them to homeowners.

He said a short-term stimulus package was "important" but would not be enough. "It's almost like a pebble in Lake Michigan; we need to be talking about much more in the short, mid and long term.”

Mr Dodd’s proposals, in a letter to Mr Reid, also included a suggestion that any stimulus package should include passage of a bill to reform the Federal Housing Administration, which provides mortgage insurance on loans.

Last September, the Senate passed a bill that would make FHA loans with more favorable terms available to subprime borrowers facing foreclosure. However, the legislation has been stalled due to differences between the Senate and a House version of the bill.

RICHARD X BOVE, PUNK, ZIEGEL & COMPANY - How is this done? For months I have been explaining that the programs to [deal with the problem] are already in existence and have been used for decades by the United States government. The program was called Section 236. It is now called Section 8. It is simplicity itself.

- The homeowner goes to the bank and applies to refinance the mortgage that he now cannot make payments upon.

- The bank qualifies him for a new 30-year fixed rate loan at 1%, if the payments are less than 30% of the homeowner's income.

- The homeowner agrees to use the house in question as his primary residence for five years.

- The bank sends the loan application to the Federal Housing Administration to be guaranteed.

- Once the FHA guarantee is received, the bank makes the loan and pays off all outstanding housing debt on this unit.

- The loan is then sold to the Government National Mortgage Association at a slight premium to par.

- GNMA then takes the FHA guaranteed loan, packages it with others, and sells it at a market yield (say 6%) to the GSEs.

- GNMA takes a meaningful loss on every loan. This loss is covered by the United States and the cost may easily reach $150 billion.

DEAN BAKER, TRUTHOUT - There is a simple and direct way in which the federal government can help out millions of moderate-income families struggling to keep their homes: They can simply change the rules on foreclosure to allow moderate-income homeowners the option to remain in their homes indefinitely as renters, paying the fair market rent.

This proposal would immediately give moderate-income homeowners a guarantee they would not be thrown out of the street because they cannot meet the terms of a predatory mortgage. It accomplishes this goal without requiring any elaborate new bureaucracy and without requiring a single dollar from the taxpayers. And this plan does not bail out the bankers, hedge funds, and other financial industry types who were speculating in mortgage debt.

Here's how the plan works: Currently, if a homeowner is not able to make their mortgage payments, the holder of the mortgage can go to court to place the house in foreclosure. This means, if the homeowner is not able to come up with back payments on the mortgage, or work out an acceptable arrangement with the mortgage holder, the bank or financial institution that holds the mortgage retakes ownership of the house and can have the homeowner evicted.

Under this security of housing proposal, the foreclosure process would be changed so the current homeowner would have the option to remain in their house as a renter paying the fair market rent. If a homeowner chose to go this route, the judge in the foreclosure proceeding would appoint an independent appraiser to determine the fair market rent for the house, in the same way a bank hires an appraiser to determine the value of the house before issuing a mortgage.

The former homeowner could then remain in their home as a renter for as long as they liked. The rent would be adjusted at regular intervals in step with the change of other rents in the area. There could even be an appeal process in which either party could request that the judge get a second appraisal, at the expense of the person complaining about the original appraisal. This should ensure the rent set for the house is fair. After the foreclosure, the mortgage holder would now own the house and be free to sell it to another person, but the former homeowner would still have the right to remain as a renter, regardless of who owned the house.

This program could be restricted to homes that cost less than the median house price for an area to ensure high income homeowners do not take advantage of it. The program would also only apply to people who lived in their homes, not investors. In short, it is a very simple and low-cost way to help moderate-income homebuyers. It does not give them any windfalls, but it can ensure they don't end up being thrown out on the street.

SAM SMITH, PROGRESSIVE REVIEW – My previously described program of shared equity – in which the federal, state and local government could help certain classes of homebuyers by owning a share of their home (and getting a share of the sales price) could also be used to get out of the current mess. The government could purchase a sufficient share of a troubled home to bring the mortgage costs down. Since home prices will eventually rise again, this would be a rare program that made a profit. . . which, of course, is why many would be scared of it - especially media and politicians. They'd rather stick with the principles of what former mayor Paul Soglin of Madison, Wisconsin called "lemon socialism" which is to say that the government can only act socialistic when there isn't any private money to be made.