HOLC

The foreclosure crisis isn't even close to being over. Rep. Miller has a wee suggestion for alleviating it.

If the government could purchase, either by voluntary sale or by eminent domain, distressed mortgages for 30 to 50 cents on the dollar, there would be ample room to reduce the principal to make the mortgage affordable. In other cases, the government could buy the home in exchange for cancelling the mortgage and enter into a long-term lease with the former homeowner.

Like the original, a revived HOLC could pick and choose the mortgages it buys. The new HOLC should only buy mortgages on owner-occupied homes, and should refuse to buy reasonable mortgages that homeowners can afford. So no homeowner should expect that the HOLC will buy their mortgage if the homeowner stops paying.

The Obama administration can establish a new HOLC without any additional action by Congress. The Troubled Assets Relief Program (TARP) legislation already gives the Treasury Department the power to acquire financial assets, specifically mortgages, and Treasury could fund the program with the $75 billion of the TARP appropriation allocated for HAMP.

That should be plenty to buy enough discounted mortgages to put a dent in the foreclosure problem. Most important, the prospect of eminent domain acquisitions of mortgages at a deep discount will motivate servicers to reduce principal voluntarily. Every government foreclosure mitigation effort so far, including HAMP, has depended exclusively on carrots for the industry, usually designed by the industry itself. The industry’s lobbying efforts have successfully denied any stick to go with the carrots, notably the judicial modification of mortgages in bankruptcy (“cramdown”). The acquisition of mortgages by eminent domain will provide foreclosure mitigation efforts with a badly-needed stick.