Having eviscerated the fourth amendment protection against unreasonable search and seizure and most of the fifth amendments protection of due process one has to wonder why the very last line of the fifth amendment "nor shall private property be taken for public use, without just compensation" being treated so reverentially.
Recently it was announced the HOPE project to help renegotiate mortgages was a complete failure. Only in Washington would that come as surprise. Leaving aside the obviously problems why would any lender agree to take a haircut while there all these proposals to buy the mortgages at full face value- most notably from John McCain during the presidential campaign. But I digress.
The real reason that it is not possible to restructure mortgages is legal.
- many homeowners have not only first mortgages but also second mortgages. A modification will require the consent of the second mortgage lender who has absolutely no incentive to agree since they stand to lose the entire amount of their loan;
- Even if there is no second mortgage, the securitizing of the mortgage ensures that there is a group of investors (those who own the riskiest tranche) who will lose the entire amount of their investment if the loan is modified. Since they can't do worse than zero there is no incentive for them to accede to any type of restructuring.
In the case of the second mortgage there is at least the possibility of buying off the second mortgage lender. In the case of securitization any preference shown to high risk investors will come at the expense of some other class of investors which ends substituting one set of disgruntled investors for another.
There are only two ways to get past this problem.
- My preferred method would be to create a new chapter in the Bankruptcy code that will provide for expedited foreclosure and renegotiation of mortgages.
- The government needs to creatively exercise its power of eminent domain and "seize" all the first and second mortgages and pay fair market value for them- in the case of the second and high risk tranches that would $0.01 recognizing their value to be zero. Having seized the mortgage the Government can negotiate with individual borrowers. If done right the collective value of the renegotiated mortgages should be greater than what the government paid for seizing them. (Note this would not violated the fair market value principle of the 5th amendment since the renegotiated package whether done by the government or private individual would have greater value because of its greater certainty.
The government should start by seizing loans made by Fannie/Freddie and the have Fannie/Freddie immediately go to court challenging the constitutionality of the seizure. Simultaneously Congress could require the Courts to hear the case on an expedited basis. If the Courts upheld the constitutionality of the seizure the government could immediately begin modifying mortgages using their eminent domain power.
Such an action would not increase the financial exposure to the Government beyond what it has already accepted. In fact it would probably reduce and make it much more transparent. Under the HOPE program the FHA would guarantee any modified mortgage (same things as owning it). Furthermore Fannie/Freddie and the Federal Reserve are purchasing mortgage backed securities and the Treasury is offering subsidized interest. Also, if there ever was a time to this, now is it while the markets are falling all over themselves to lend money to the government (0% interest on t bills).
The only thing IMHO holding them back is that money class would like to retain the power of eminent domain for their own favored personal purpose. God forbid that it actually be used for the purpose that it was originally intended - the general welfare.