"(T)he Federal property manager shall implement a plan that seeks to maximize assistance for homeowners," it said. "In the case of a residential mortgage loan, modifications made under paragraph (1) may include -- (A) reduction in interest rates; (B) reduction in loan principal; and (C) similar modifications."
In other words, if your neighbor took out a $300,000 mortgage even though he could only afford a $200,000 mortgage, the federal government -- which would now own your neighbor's mortgage -- could simply reduce what your neighbor owes from $300,000 to $200,000. And it could reduce his interest rate from 6.5 percent to 5.5 percent. And it could extend the time he has to pay from 30 years to 40 years.
What would this say to the people in the neighborhood who did not overextend themselves and who faithfully pay their mortgage every month? It would say: You're a fool. Your profligate neighbor took the wiser course.
And it would also say: Please keep paying your taxes on time because we may need your money to cover the $100,000 we just cut from your neighbor's mortgage.
So what is the alternative?
The Republican Study Committee, a group of about 100 conservatives in the U.S. House led by Rep. Jeb Hensarling of Texas, has proposed that the government insure all mortgage-backed securities instead of buying up the riskiest ones.
Under this scenario, institutions that hold mortgage-backed securities would need to buy federal insurance that guarantees them the principal and interest payments on any underlying mortgages that default. The insurance premiums would be risked-based, so securities that had more defaults would pay higher premiums. With this federal insurance behind them, the securities would be marketable again. The private organizations holding the mortgages would need to cut their own deals with those who don't pay their bills.
This would still be a bailout. This would still be big government. But it is better than turning the U.S. Treasury into the world's largest mortgage broker.
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