How to Fix the Foreclosure Crisis: A Real Bailout

Our options are dwindling and, perhaps the only thing that can help an entire stratum of the American population is action—strong, decisive, intelligent action—to stop the epidemic of foreclosures. The jobless rate is high, but not at unprecedented levels. On the other hand, the foreclosure rate is as high as it has ever been, even during the Great Depression, and threatens a much larger number of people than it did 80 years ago.

Though many proposals are on the table, there is no easy solution. Perhaps understanding the genesis of the disease, however, will help to construct a solution, or at least to appreciate what solutions won’t work.

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In 2008 and 2009, the United States government engineered a massive bailout of our largest and most important financial institutions. Literally trillions of dollars were expended to preserve the likes of AIG, Bank of America, and many others. The reason that these financial institutions needed help was that they held, or sold, or insured very large pools of securitized mortgages that became worth very little very quickly. But instead of “foreclosing” on those institutions that were “too big to fail,” the government did, in my humble opinion, the right thing. They pumped a great deal of money into the beleaguered system and thus prevented what might have actually been a collapse of the entire world financial order.

The trouble is that government largesse to those institutions at the top of the economic food chain didn’t solve the underlying problem. In a staggering number of cases real estate was simply not worth the money that had been lent against it. So the financial system survived, but the problem “trickled down” to all those individuals who had, for one reason or another, overpaid for homes or over-financed those purchases. Unfortunately, we are still dealing with the exact same problem, except the “we” isn’t the government, it’s us.

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The HBO film “Too Big to Fail,” based upon Andrew Ross Sorkin’s runaway best seller, ends with Hank Paulson (William Hurt), then Treasury Secretary, guardedly assuming—but by no means certain—that the billions given by the government to the biggest banks in America would be used by them to make enough loans to solve the underlying problem.

They didn’t, and perhaps they can’t, because we certainly wouldn’t want another wave of lending to individuals who are not creditworthy, or on real estate that is overpriced. That’s what caused the problem in the first place.

What has to happen now is that someone needs to sponge up all of the misery that has trickled down to millions of consumers who are losing their homes. Whichever side of the political aisle you’re on, you need to recognize that only government has a sponge that large. Even given the fact that the U.S. government is having its own fiscal troubles right now, we need both parties to end the politics of “No!” and find a way to rescue millions of American homeowners from foreclosures without breaking the Fed’s back.

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