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Ezra Klein on Fixing the Mortgage Mess

Ezra:

Four ways the foreclosure mess could be used to help homeowners: Foreclosures have paused. There's renewed recognition that the business practices behind the housing bubble were a mixture of insane and fraudulent. The banks will probably need some government help again.... Our response to the financial crisis had three parts: The bank and auto bailouts, the stimulus, and the efforts to help homeowners facing foreclosure. The bailouts worked pretty well. The stimulus was much too small, but at least did what it said it was going to do.

The help for homeowners, however, has been a disaster.

Blame the Home Affordable Modification Program. It's a voluntary program in which participating mortgage servicers can renegotiate terms with struggling homeowners.... Most of the homeowners who were eligible for the program were never told of it. Many of those who did enroll were bounced out.... Most of the program's money hasn't even been spent.... [W]e're on track to see a record number of foreclosures this year, and then we're predicted to set another record in 2011.

We can do better.... Repair HAMP: The problem with HAMP is that it leaves mortgage modifications up to the banks, and they're not much interested in modifying those mortgages.... [H]ave the Treasury Department empower housing counselors to modify the mortgages... and banks would have three months in which to challenge the new terms.... Cramdown: The original theory of HAMP was that it would be the carrot... but there'd also be a stick. That stick was cramdown... empowering bankruptcy judges to modify the principal.... Mandatory mediation.... A mandatory mediation program would force [banks] to sit down with homeowners... make a good-faith effort to figure out a way forward. A program along these lines has been extremely successful in Philadelphia. Right-to-rent: Under a right-to-rent program, foreclosed homeowners would have the option of renting their home at fair-market value for five years...

The failure of HAMP is a big black eye for the Obama Treasury Department. So far it is batting two for five--the stress tests were a success, the auto rescue was a success, but HAMP and PPIP have not been and the bank rescue failed in its task of making sure that government help was charged to banks at "a penalty rate."

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