I'm finding it hard to think originally about how best to fix the mortgage mess; I keep falling back on the homilies of childhood. My Dad used to say it rained on the just and the unjust alike. I accepted that even though I wasn't always sure if the rain was a good thing helping the unjust or a bad thing hurting the just. Sentiment these days seems to be more negative regarding the first option than the second. Those not standing in line for help themselves seem to feel more strongly about not helping the unworthy than about helping the worthy. The Prodigal Son probably wouldn't be welcomed home these days either.
If we had all followed Shakespeare's caution to "neither a borrower nor a lender be," we wouldn't be in this mess, but then again we probably would be even less prosperous than we are. Presumably, until recently, lending and borrowing helped raise our standard of living; but we carried a good thing too far.
Since this feels like a learning moment, let's go to the source for elaboration: Hamlet, Act 1 scene 3:
Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
This above all: to thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man.
The solution we are looking for is how to help the truly worthy needy borrower whose predicament is not of his own making without also helping those less innocent. That, of course, is an impossible task for the government, which, almost by definition, must use one-size-fits-all solutions. The Rick Santelli rant on CNBC's Squawk Box reflects the anger this creates in much of the populace.
There are no good options acceptable to all. Probably one of the more effective, but least desirable, options is to authorize bankruptcy judges to change the terms of the mortgage contract for the benefit of the borrower and to the detriment of the lender. That's known as a "cram down" provision. That may be a practical solution since the revised terms may still be more advantageous to the lender than foreclosure, but the price paid by compromising the sanctity of contracts is steep. Apparently, bankruptcy judges already have that authority for homes that are not the owners' primary residence, but that doesn't sit too well either. I guess there's not much desirable about bankruptcy.
Another program the Obama Administration recommends is for the government to split the cost difference with the lender or the mortgage servicer for relaxing the terms of the original mortgage. To provide a reward for good ongoing behavior, a "pay for success feature" would reward servicers if the loan is kept current, up to a $1000 per year.
Another approach recommended by the Administration is for the government to add another $100 billion each to the capital of Fannie Mae and Freddie Mac to "shore up confidence" in these organizations that are already under government control. With more capital and more confidence, Fannie and Freddie would be in a stronger position to help solve the problem with more low-cost mortgage generation and guarantees. Some hair of the dog.
Even mortgage debtors who are current with their payments are to be helped to bring their monthly payments down to no more than 31% of their income. Presumably, these will be people who started off with their debt in good alignment with their income, but whose position worsened with the financial crisis and the declining economy and declining home prices.