Solutions!

I’ve been waiting for someone to outline an idea to me about good forward-looking proposals to help clean up this mess and now here comes Andrew Jakabovics for CAP:

While securitization adds complexity to the question of where the authority to modify loans lies, we believe that recent actions by the Federal Deposit Insurance Corporation to engage in wholesale loan modifications for bankrupt California lender IndyMac Bank’s loans—which it now holds directly or in a servicing portfolio—serve as guidance for where U.S. mortgage giants Fannie Mae and Freddie Mac and the private mortgage servicing companies must go.

The housing bill that recently passed into law mandates a Treasury study of auctions of mortgage pools based on the Center for American Progress’s Saving America’s Family Equity, or SAFE loan program, to get large numbers of loans into the hands of new investors who could restructure the existing loans so that they would perform. Under the SAFE loan program, the discount below face paid at the auction would allow the new note holders to do the necessary writedowns without incurring losses.

The SAFE loan program, like the FDIC actions, recognize that both borrowers and investors, and ultimately taxpayers, are better off when loans are restructured rather than allowed to proceed to foreclosure. Liquidity will return to Wall Street when the confidence in Main Street’s ability to pay its mortgages is restored. The Bush administration should accelerate that study so that U.S. financial regulators can get down to the real business at hand—finally fixing the problem in the mortgage marketplace at its source.

This sounds reasonable to me. I also don’t really understand why the Fed decided to eschew a rate cut earlier this week. Recent inflationary pressure had all come from rising commodity prices, and those prices seem to be headed down in anticipation of a worldwide downturn. Nothing remotely resembling a dangerous wage-price spiral was ever in sight and certainly isn’t in sight now. The big risk would be that the scary news from the financial market leads to job and income losses in the “real world” that lead more people to miss their mortgage payments and send us into a downward spiral.