The recent defeat of the "bailout" plan by the House of Representatives is shortsighted, and may prove harmful. Responding to feedback from their constituents, House Republicans defeated a proposal that would allow the transfer of tainted mortgages from financial institutions to a governmental agency that would administrate these troubled mortgage loans.
Concerned citizens listed a number of reasons for their displeasure for the bill, among them:
o The bill is seen as a reward for firms that engaged in deceptive lending practices, or that encouraged speculation in the Real Estate market
o The bill would allow executives in companies that made bad decisions to collect excess salaries and bonuses for their poor performance
o The legislation would come at the taxpayer's expense, and would force ordinary citizens to subsidize practices that they neither condoned nor benefited from
o Passing this legislation offers no guarantees that the underlying economy will recover
A number of these points are valid, but generally, they point to a desire to assign blame or fault for the current economic situation facing the country, and do not address the issue of how to restore confidence in our banking system. For this reason, I believe that Congress should focus on two separate bills to address the crisis.
The first bill should seek to correct the issues facing the liquidity crisis. This legislation needs to be passed quickly, to prevent a crisis of confidence which we witnessed on Monday, September 29, 2008. It should provide relief for mortgages that had turned bad, and should also provide relief for individual homeowners. A lending fund should be established that would allow homeowners to re-finance balloon loans with affordable fixed-rate loans, homeowners whose houses are facing foreclosure to obtain loans at more reasonable rates, and ultimately provide an effective auction-style processing of homes already in foreclosure, and returning the proceedings to a governmental agency. This agency should be empowered to re-sell these mortgages, when viable, at rates that produce a long-term profit for the agency.
These funds should then be returned to taxpayers as the mortgages are sold off at a profit. New mortgage funding practices should be drafted into the legislation which would require licensing of mortgage lenders, in much the same way as licensing is required for real estate agents, CPAs, Certified Financial Planners, etc. Effective licensing of mortgage lenders, along with stricter lending rules, would prevent the types of abuses that prevented anyone to become a "mortgage lender."
The second piece of legislation that Congress should consider was done in a more reflective manner. This piece of legislation should consider how to limit excessive executive compensation for firms that were involved in the "bailout." Similarly, legislation should address abuses that can be shown to have occurred and appropriate fines and penalties that are enacted for the firms that contributed to abusive practices. Thirdly, where executives at abusive firms contributed or profited from abusive behavior, they should face the prospect of fines, penalties and jail-time for the abuses. Finally, a separate agency, similar to the Financial Accounting Standards Board (FASB) should be established that would be charged with developing best practices, guidelines, and oversight for the mortgage industry.
By separating out the legislation into two separate pieces, Congress can provide quick relief to the credit markets, provide assistance to taxpayers, and enact legislation at a later date that address taxpayer concerns about accounting, regulation, and governance.
Source by Peter Ponzio