By Carolyn Betts, Esq.

I agree with every point in Bernie Sanders’ proposal but have a suggestion.

I worked with lead counsel to the RTC (the government entity that served as receiver for defunct savings & loans) in designing and implementing the sealed bid auction program for non-performing commercial mortgage loans during the S&L crisis. I also worked for FHA’s lead financial advisor in carrying out the Congressional mandate that HUD enter into “negotiated” sales of its nonperforming multifamily loans to state housing finance agencies. Based on what I saw in these contexts and in carrying out sales of pools of VA, Farmers Home and HUD performing and nonperforming single-family loans, both in auctions and in mortgage backed securities form, my conclusion is this: the Wall Street players made out like bandits, ultimately at taxpayer expense and borrowers were not helped.

I suggest we try another tack, in addition to what Congressman Sanders proposes: support the BORROWERS of the troubled loans, not the OWNERS of the loans. I believe there is a good chance that there is collateral and other fraud in these mortgage loan portfolios. I.e., loans with no properties to support them, multiple loans secured by a single property, loans used to launder money through government guarantees. This conclusion is based in part on the numbers, which don’t make sense, and upon observation of the number of HUD-insured loans that have gone into default before a single payment was received. If the lenders are just paid for these loans what is the theoretical value in a good market for these loans, assuming they are performing (i.e., above current market value), the lenders will get a windfall and be rewarded for making fraudulent and/or predatory loans. And the bailout as proposed will be a perfect way to hide the evidence of wrongdoing.

Would it cost anywhere near $700 Billion to have the government stand behind the borrowers’ obligations, in concert with a program to address unemployment/ underemployment and health care issues that are the primary sources of financial problems that cause these loans to go into default? I think not. I would impose a condition that the existing “problem” home loans in portfolio, and maybe also related home equity loans, be marked to decent rates of interest and reamortized over 30 or 35 years, with write-off of penalty interest, late fees, etc., at lender expense. Then, to the extent the borrowers still cannot make their payments but want to stay in their homes, have the government funding program (with a local-level administrator NOT controlled by those who caused the current crisis) make up the difference. Perhaps the government gets a lien on the property for only the amount of the borrower’s shortfall after a period of time during which the health care fix and jobs programs can take effect (say, 18 months).

I agree that the bailout bill will be a disaster, in so many ways I can’t even list them all. Allowing the market to crash, with all its consequences, would be better than giving away $700 billion + to the perps that brought us to the brink of world economic collapse. The longer we keep putting fingers in the dikes to avoid the consequences of bad decisions, money laundering and theft by the corporadoes, the worse the eventual flood will be.