December 7th, 2008

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Just When I think the Treasury Might Be Getting Smart, They Show I'm Wrong.

OK, at this point, I'm convinced the only way out of this is to resurect the Bank of the United States, capitalize it, and have it make refinancing loans. Oh yes, and we will need to pass a statute that requires all holders of commercial notes secured by a primary residence to accept such refinancing regardless of any term or agreement in the debt instrument.

Admitedly, this is in part from my bitter disappointment that the latest much-touted Treasury scheme for reducing the interest rate to 4.5% is not actually aimed at refinancing, or to be used to grant loans directly. Rather, as explained here, this is yet another "lets give money to banks to get them to make loans." This time, there would be a modest string atatched of making the 4.5% rate available to purchasers of new homes, but not for refinancing.


Paulson is a frikkin' moron! No, he's not. But he is just completely incapable of escaping his prejudices and taboos about government involvement in the market that have built up over his career.

OK -- if we want to stop the bleeding, we need to provide people with mortgage relief. I'm happy to make this available to everyone, not just the subprime borrowers. Have Fannie and Freddie reconstituted as the Bank of the United States. Make loans at 4.5% as refinancing loans. The federal government will hold the paper. Separate assessors wil actually assess which is the commercial paper most likely to get paid and sell those in the secondary market. Subprimes will be held by the federal government, which will work to keep people in their homes until such time as the market actually stabilizes. We will convert whole blocks of housing into designated low-income housing and permit "sweat equity" payoff for maintaining the home in reasonable condition.

Way back when I was in law school, I wrote some draft legislation to handle this when we had the last market downturn in '89-'90. I need to dig it up.