Political and finance officials must take bold steps to solve the mortgage mess and credit crunch

In critical economic times such as these, progressive thinking and drastic measures are needed in order to avert an economic disaster of historic proportions. The current mortgage mess and credit crunch have the potential of decimating the entire economy.

It took the progressive thinking and drastic government measures of President Franklin D. Roosevelt to pull the country out of the Great Depression. (I would suggest reading Federal Reserve Chairman Ben Bernanke’s book “Essays on the Great Depression” for more detailed analysis and insight on the subject.) It will take similar thinking and drastic government measures to avert this oncoming economic disaster.

Every day there are articles and news reports regarding the mortgage crisis in which people are saying “We shouldn’t bail out speculators” and “Why should I pay for homeowners who made a bad decision?” Both are legitimate questions with well-founded concerns. However, similar statements were made during the stock market crash of 1929 and the real estate market crash that followed. By the time the Federal Reserve, the president and Congress acted, it was “too little, too late,” and the U.S. economy was well on its way into the depths of the Great Depression.

Many people want to point fingers at others for the mortgage mess and the credit crunch we are currently in, and indeed there is enough blame to go around. From former Federal Reserve Chairman Alan Greenspan keeping the federal funds rates too low for too long, then raising them much too quickly and too high; to individuals who took advantage of the low interest rates to get into a bigger or newer home and who used their home as a source of credit for discretionary spending; to homebuilders that built too many homes; to real estate speculators that exacerbated market conditions; to some mortgage brokers who were unscrupulous in their practices; to the major banks, which participated in lending money to mortgage brokers doing subprime loans; to Wall Street, which was more than willing to securitize the questionable mortgages; to the investors who bought the enhanced-yielding securitized loans through investments offered by brokerage firms. The list goes on and on. This was a classic economic bubble in real estate, and greed was everywhere.

That greed has now turned to anger, and there are investors, companies and homeowners who have already hired lawyers to begin litigating the solution they want. I believe that litigation will be a monumental waste of time, energy and precious resources, when all are in short supply.

Using the Great Depression as the example, we as taxpayers can either pay now or we can pay more later — much, much more. Either way it is going to cost a lot. If we continue to dwell on the past, point fingers and delay needed action, while worrying over the expense of fixing the problem, we most certainly will experience an economic disaster — all of us. The poor will pay with extremely high unemployment, the rich will pay in dramatically higher taxes, and everyone else will fall somewhere in between. We need to stop wasting time playing the blame game, bite the bullet and move forward.

Coming from a conservative who has been a free market advocate, much of what I propose may make some heads spin. Again, in critical economic times such as these, progressive thinking and drastic measures are needed.

Congress needs to pass legislation that includes the following emergency relief proposals for homeowners, for a period of not less than 24 months.

• Mortgage rates need to be pegged to federal funds rate: The Federal Reserve cut the federal funds rate a total of 3 percentage points, from 5.25 percent to 2.25 percent, from September 2007 through March. During that same period, the 30-year fixed rate for conventional mortgages dropped only about three-quarters of a percentage point to around 5.75 percent.

I suggest that the 30-year conventional mortgage rate be pegged at 2 percentage points above the federal funds rate. Under this proposal, with the federal funds rate currently at 2.25 percent, the 30-year conventional rate would be 4.25 percent.

This proposal will have an immediate impact of lowering mortgage interest rates to a more appropriate level so that stressed homeowners will be able to refinance their mortgages to a more affordable monthly payment. This will allow most homeowners to remain in their homes and stem the tide of foreclosures.

• Equity Participation Rider: The lender will receive an Equity Participation Rider on the new mortgage to help offset the lower interest they would receive under the proposal above. The rider should not be more than 5 percent of any capital gain on the home if it is later sold or refinanced. The gain would be calculated based on the difference between the current mortgage balance or current appraised value, whichever is higher, and the price of the home when it is later sold or refinanced. The rider would not have an expiration date. This would give an incentive for financial institutions to refinance mortgages, and would also give them a vested interest in seeing the housing industry stabilize and housing prices improve. Wall Street will likely embrace this incentive and find ways to profit from it.

• FHA insurance should be made available to all homeowners with conventional mortgages: The Federal Housing Administration, an agency of the federal government, insures private loans against possible default for homeowners whose credit and down payment do not meet the higher qualification standards at FNMA or Freddie Mac. Once the FHA steps in to insure all conventional loans, lending institutions will begin to refinance mortgages once again because the risk of default has shifted to an agency backed by the U.S. government. Since the homeowner actually pays for the FHA insurance, the federal government’s risk is minimal. Reinsurance companies will likely step forward and want to profit by reinsuring the FHA’s risk.

Lending institutions using the FHA insurance would only be allowed to refinance the current mortgage balance plus reasonable fees rolled into the new mortgage balance. Congress does not want to exacerbate the current housing crisis by allowing homeowners to, once again, use their homes as an ATM. In addition, the new conventional mortgage limits temporarily established for FNMA and Freddie Mac, up to $729,750 for single-family residences, should be the same for the FHA on a regional basis, and should be made permanent.

• No document (income verification) refinancing: Any homeowner with a mortgage should be able to refinance their mortgage loan amount without having to provide the normally required documentation of income, earnings or tax returns. If they currently have a mortgage loan, they can refinance it — no questions asked. Call it Homeowner Amnesty if you will. Current mortgage refinancing qualifications demanded by most lenders today are so stringent that even some creditworthy homeowners can’t qualify to refinance. (That is one reason we have the credit crunch.) This proposal will eliminate the qualification hurdle.

• Voluntary elimination of refinance penalties on existing mortgages: Congress should encourage mortgage lenders to voluntarily eliminate all refinance penalties on existing mortgages, so that homeowners can refinance without incurring another financial hit. Since the Federal Reserve is helping save the banks and the mortgage industry, with billions of dollars in loans, lenders should help homeowners by waiving any refinance penalties.

Enacting these proposals will begin to help fix the mortgage mess and cure the credit crunch by giving direct aid to homeowners in lowering their monthly payments and reducing the likelihood of foreclosure. This will help stop the downward spiral of the housing market, which affects all of us. This will also free up billions of dollars in savings in mortgage payments, some of which will, most likely, be spent by the homeowners on goods and services, thus helping to spur on the rest of the economy.

Congress and the president need to enact these emergency measures immediately. The recently enacted stimulus package, and the current legislation before Congress, will simply not be enough to get the economy back on track and do not go far enough in helping individual homeowners. Every day that is wasted by our elected officials playing political football with this critical issue, or being distracted by other less critical issues, is another day closer to a pending economic disaster.