Not So Fast On Mortgage Solutions

04/02/2008 05:12 am ET | Updated May 25, 2011

A drumbeat is building for some form of federal takeover of troubled home mortgages. Sen. Chris Dodd (D-Conn.) is leading the charge in the Congress, while Bank of America has been lobbying hard behind the scenes. Respected economists like Paul Krugman and Alan Blinder, both of Princeton, have added intellectual heft to the bandwagon.

To construct new legislation, the two most cited precedents are the Resolution Trust Corporation (RTC) that cleaned up the mess left by the 1980s Saving and Loan bust, and the Depression-era Home Owners Loan Corporation (HOLC), Blinder's favorite, that took over some four million mortgages in the 1930s.

Neither precedent is fully on point. The RTC was a mortgage seller, not buyer. When the government paid off the depositors of bankrupt S&Ls, it automatically acquired a mare's nest of dicey commercial and residential mortgages. The RTC then ran one of the biggest fire-sales in history, bundling up assets into big collateral pools that were sold off en masse to Wall Street and other big investors. Inevitably, many of the firms that made a bundle creating the crisis made a second one on the way out.

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