Such radical policy action includes a government plan to purchase – at a significant discount to minimize its fiscal cost – hundreds of billions of dollars – possibly trillions – of mortgages, effectively a nationalization of mortgages. Once purchased by the governments at a significantly discounted price these mortgages could be restructured to reduce their face value, reduce the interest rate on the mortgage and allow distressed but solvent borrowers to avoid foreclosure. To limit borrowers’ moral hazard only truly distressed borrowers would qualify: i.e. no condo flippers, no second home borrowers, no early default borrowers; only borrowers that were likely to be subject to deceptive and/or predatory lending practices. Only this formal nationalization of mortgages will start to stop the foreclosure disaster and jingle mail tsunami ahead of us. The fiscal costs and lenders’ moral hazard risks of such a plan can be significantly reduced if action is taken early and if the price at which the government buys mortgages from lenders is low enough.
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