BOSTON--"We know how to prevent foreclosures," Federal Reserve Bank senior economist Paul Willen told The New York Times. "We just need to be prepared to spend the money." Willen sees two possible solutions: Require banks to modify loans, imposing the cost on them; or pay banks to modify loans, imposing the cost on taxpayers.
Millions of American families have lost their homes to foreclosure since the global economy crashed in 2008. At this writing, 4.4 million more households are in severe default on their mortgages, and that doesn't count the millions of renters who are getting evicted.
The overwhelming majority of these people got into trouble through no fault of their own. Most lost their job or suffered a medical catastrophe. They're victims of the usual boom-and-bust cycle of corporate capitalism.
Laissez-faire conservatives argue that things will sort themselves out and that society will wind up stronger as the result of "creative destruction." But the scale of the post-2008 depression is too big to sit on our hands.
Most frightening, there is no hope of economic improvement. President Barack Obama hasn't enacted a jobs program. No new technology is waiting in the wings to spur economic growth as the Internet did during the 1990s. The cavalry won't be foreign investment; the rest of the world is struggling, too.
In 2009, the Obama administration announced Make Home Affordable to assist distressed homeowners. But--unsurprisingly, since it was voluntary and therefore toothless--MHA has been a bust. Fewer than 500,000 households have received modifications to their mortgages. Banks like Citibank, Chase and Bank of America intentionally "lost" paperwork they requested so they could evict their customers and seize their homes as quickly as possible--frequently using fraudulent documents bearing forged signatures. FDIC chairperson Sheila Bair said: "We ... know that in too many instances, servicers have not made meaningful efforts to restructure loans for borrowers who have documented that they are in economic distress."
Millions of mortgages are going to need reduced interest rates and lower principal to reflect the new reality. So who's going to pay?
It would be unfair to burden the taxpayers for the cost of loan modifications. First and foremost, many people rent. Why should people who can't afford the American Dream subsidize it for others?
Besides, the taxpayers already paid. The 2008 TARP bailout should have gone to the unemployed and homeowners facing foreclosure; when they paid their mortgages this would have wiped those "toxic assets."
At a minimum, banks that can't find the note to prove they own a foreclosed home, and those that used fraudulent "robo-signers" for documents, ought to lose their mortgages.
Next an investigation should be conducted of general bank malfeasance during the go-go '90s and 2000s. Any bank that charged exorbitant interest rates on credit cards, ravaged debit card users with insane ATM fees and failed to notify borrowers of the terms of their adjustable mortgages should similarly face the only sanction they might remember the next time they're tempted to behave indecently: All their mortgages and credit card debt lines ought to be wiped clean.