As everyone knows, this current problem with Fannie Mae, etc., blowing up is bad. Not everyone knows that Fannie Mae became a liberal play toy to follow their racist agenda: more money to the Democrat constituency of "the poor" and "black neighborhoods" that "have been discriminated against for years."
Facts have been proven that a poor family is not a good place to place mortgage. There are better means to develop home ownership.
In essence, we need to solve a problem created by failed liberalism. Conservatism is the solution to failed liberalism. The problem is that sudden changes in economic systems create many additional problems. For example, the changes in real estate taxation practices in the 1986 tax reform act decimated the commercial real estate world. The change was rather sudden. It was difficult.
No matter what the solution, it must be over a period of time. The biggest drawback to this is that the persons hurt by the change have chance to constantly encourage changing the rules of the game. For example Sen. Lugar Farm bill. It is as if it never happened. A five-year turnaround meant short-term changes and long-term stagnation in bad ideas.
What we need to do is balance the need for sudden changes with a natural blocker against the riff-raff who caused the problem regaining its facade of credibility and trying to undo the reform.
Imagine that we are dealing with a flooded house. How do you drain it and start cleaning it? Do you try to pump high-pressure air into the house in order to force the water out of the small openings into which the water had originally flowed? No. You open all doors and windows under water and let gravity take its course. Then you set up siphons and wet-dry vacuums to get to work. You pump as little as you can and let nature do as much of the work as possible. Obviously this system is most effective where doorways are at the lowest level of the house -- floor level and not above basement level. The lesson here is find places where finances can help to naturally clean up the situation.
Where the forces of economics cannot clean out the mortgage-version of a basement, we need to force a financial fix into the system.
Nationalizing all mortgages is the equivalent of closing the ground level doors and to turn on the air pump to force the ground-level water out. It takes too much work and is likely to cause windows to be blown out from air pressure than the water caused. Forcing more money into the system does not help us allow the bad money to flow out as efficiently as possible.
We need a method that tracks what is good money and what is bad money. Then we need to set up a system that pushes out bad money without pulling significant amounts of good money out.
If we can do this, more banks will fail. More people will face foreclosure. However, some banks and people deserve it. Imagine you go into your bank and they offer you a mortgage for $50,000 and you don't have to prove how much money you make. Then the banker tells you that you just need to tell the bank you make more than $80,000 per year. No documents. No follow up. Just your word.
What would you do? How much money would you be tempted to tell the banker you make? If you honesty make more than $80,000, it's a no-brainer. You tell the banker the truth. You get the loan. You can likely repay it. No problem.
If you don't make that much, would you be tempted to lie and tell him, "Funny that you should mention $80,000. That's how much I make!"? Now you get your new-found money! That was easy!
Later you find out that you can't make your monthly payments. You end up in a financial mess. It is your fault or the banker's fault that you are in this situation? The rules of psychology say that if you are the debtor, you blame the banker for suckering you into the loan. You ignore that you had to lie to get the loan.
Is your ill-gotten money, good money or bad money?
I would suggest that it is bad money. You had to commit bank fraud to get it.
Is that a situation that we want to give you Uncle Sam's/the taxpayers' money to fix the situation and keep the liar in his house? Do we want Uncle Sam to reward the banker for not assessing whether the loan was likely to repaid? What if Uncle Sam threatened the banker with sanctions if the banker asked you to prove you had the income to repay the loan?
But here lies the problem: the bankers were encouraged by two Democratic administrations over 30 years with Department of Justice investigations if they asked for basic information about the debtor's financial situation. This Republican administration tried repeatedly to require bankers to ask more questions. Congressional Democrats prevented the fixes from coming to the floor of the US Senate.
Now what do we do to solve it?
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