[NYTr] Save Sub-Prime Borrowers, Don't Bail Out Billiionaires

[All the News That Doesn't Fit]

Common Dreams - Aug 20, 2007
http://www.commondreams.org/archive/2007/08/20/3297/

Save Subprime Borrowers, Not Bloated Bankers

by Dean Baker

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 that 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 that 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 that 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 that 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 that 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 that 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 that they don’t end up being
thrown out on the street.

In contrast, the politicians are lining up with plans that ostensibly
protect homeowners, but would most immediately benefit the mortgage
holders who speculated in predatory mortgage debt. For example, one
popular proposal being circulated in Congress would vastly expand the
role Fannie Mae and Freddie Mac, the government created mortgage
intermediaries, in the mortgage market. This proposal would allow them
to buy up hundreds of billions of dollars of subprime and other
mortgages that the private sector does not want.

Of course, the private sector doesn’t want these non-prime mortgages
because the default rate is soaring. If Fannie Mae and Freddie Mac
suddenly got in the market for this debt, those who are currently
speculating in these mortgages stand to make a fortune. It’s not clear
that the government’s largesse will necessarily benefit moderate income
homeowners facing foreclosure, but there is certainly a possibility
that some of the windfall will trickle down.

The point here is simple. We can design a mechanism that will directly
benefit millions of moderate income homeowners who are struggling to
hang on to their homes. Or, we can come up with schemes that will
benefit the banks and hedge funds who speculated in mortgage debt.
Place your bets.

[Dean Baker is the co-director of the Center for Economic and Policy
Research (CEPR). He is the author of The Conservative Nanny State: How
the Wealthy Use the Government to Stay Rich and Get Richer
(http://www.conservativenannystate.org). He also has a blog, “Beat the
Press,” where he discusses the media’s coverage of economic issues. You
can find it at the American Prospect’s web site
http://www.prospect.org/cs/home ]

                                ***

CounterPunch - Aug 18, 2007
http://www.counterpunch.org/nader08182007.html

Greed and Folly on Wall Street

Here Come the Corporate Bailouts

By RALPH NADER

The corporate capitalists' knees are shaking a bit. Their manipulation
of the sub-prime housing market has led to a spreading credit crunch
and liquidity crisis. So it is time for them to call on Uncle Sam--the
all purpose bailout man.

Only don't call it a bailout yet. It is just an injection of over $200
billion in the past week to stabilize the heaving financial markets by
the European Central Bank and our Federal Reserve. Governments to the
rescue--again.

My father many years ago asked his children during dinner table
conversation: "Why will capitalism always survive?" His answer:
"Because socialism will always be used to save it." As a small
businessman himself (a restaurateur), he was not referring to the
little guys on Main Street. He was talking about the Big Boys. Today,
we call these self-paying CEOs "corporate capitalists."

Central Banks are government regulators after all. Among other impacts,
they regulate interest rates. But they are so saturated with banking
executives or former banking officials on their Boards, Committees and
at the helms, that they see themselves as part and parcel saviors of
their banking brethren.

Brother Henry M. Paulson, formerly with the Goldman-Sachs investment
giant and now U.S. Treasury Secretary just said: "The markets are
resilient. They can absorb those losses. We've gone through challenging
times in the markets, and we will rise to the challenge."

We? Paulson is a government official who is supposed to be worrying
about the people first--such as the millions of homeowners who are
slated to lose their homes in the next 18 months.

How to help these "borrowers, not the wheeler-dealers," as columnist
Paul Krugman described his "workouts, not bailouts" plan in The New
York Times (August 17, 2007) should be Paulson's chief concern.

Secretary Paulson did tell The New York Times that federal regulators
should try to eliminate fraud and market manipulation and that there
needs to be more disclosure of the holdings and actions of hedge funds
and other private pools of capital.

Well, that's talk. Where is the action? Krugman, an economist, believes
that the current real-estate bubble was "both caused and was fed by
widespread malfeasance. Rating agencies like Moody's Investors Service,
which get paid a lot of money for rating mortgage-backed securities,"
seemed to be performing much like the major accounting firms that
rubber-stamped the inflated, deceptive financial statements of the
Enrons and the Worldcoms.

Passing on the risks of these mortgage loans through more and more
complicated financial transactions, which are in turn bet on by the
huge derivatives markets, allows wider transmission of these risk
viruses throughout the national and the global financial markets.

A kind of dominoes effect sets in and induces panic selling and panic
inability to obtain daily commercial loans in the stiffening credit
markets.

The European Central Bank recently has poured tens of billions of Euros
into the global financial system after the giant French bank BNP
Paribas SA froze three of its investment funds.

If matters get worse, the Central Banks will inject more money into the
system. If financial markets start collapsing along with investor
confidence, then Uncle Sam will certainly adopt additional direct
bailout options.

One man--Mervyn King, the Governor of the Bank of England, is the lone
central banker who resists intervening in the markets. "Interest
rates," he asserts, "aren't a policy instrument to protect unwise
lenders from the consequences of their unwise decisions."

Bailing out investors and their risky investments would just induce
them to take on bigger risks next time, expecting another bailout, he
believes.

More and more, corporate capitalists in side and beyond the financial
markets do not want to behave as capitalists-willing to take the losses
along with the profits. They want Washington, D.C., meaning you the
taxpayers, to pay for their facilities (as with big time sports
stadiums) or take on their losses because they believe that they are
too big to be allowed to fail (as with large banks or industrial
companies).

These corporate capitalists should be exposed when they always say that
government is the problem whenever it moves to help the little guys
with health and safety regulations, for example, but government is
wonderful when the bureaucrats are summoned to perform missions to
rescue them from their own greed and folly.

[Ralph Nader is the author of The Seventeen Traditions.]