Leveraged Flameout

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In February the Obama administration announced a $75 billion program to keep homeowners who are either behind or in danger of falling behind on their mortgages from landing in foreclosure. The idea was to provide incentives for the mortgage holders to modify the loans, essentially reducing monthly payments to affordable levels. The Treasury Department grandly announced that as many as 4 million homeowners would obtain relief under the program.

A May 25 New York Times article quotes a Treasury spokesperson as saying that “more than 10,000 but fewer than 55,000” homeowners have actually been helped by the program. A far cry from 4 million! In fact, the mortgage companies are playing a game of chicken with the government. As the number of foreclosures continues to rise, the companies are betting that the government will be forced to do another bailout. Why write down mortgages when Uncle Sam can be counted on to pour billions into your coffers to avert a financial meltdown? That this is the mortgage companies’ game plan I am virtually certain, based on what I have heard from people who have sought relief from their mortgage holders, plus the paltry number of mortgages modified so far.

When will we learn that public-private partnerships invariably yield the worst of both worlds? Fannie Mae, Freddie Mac, AIG, General Motors (and let’s not forget the Postal Service): how many examples do we need? The American financial system, despite gains in the stock market and an apparent return to something like normalcy, is an Augean stable that awaits its Hercules. In this case we need someone who will stand aside and let the system wash itself out. But who among the political bureaucratic elite has the courage simply to let it happen?

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