Recently, Third Way released a memo titled "Fixing foreclosure-gate" . In the memo, my colleague Anne Kim and I laid out a case for congressional action in response to widespread dispute and confusion over "robo-signing" and other failures in foreclosure processing and paperwork, as well as the recent Ibanez decision by the Massachusetts high court.
While we expect and welcome spirited debate over our ideas, we also want to ensure that our proposal is fairly characterized.
For example, some recent blog postings have described the Third Way proposal as an "administration trial balloon" and Third Way as a "conduit of business policy to the White House." However, we can categorically say that this proposal was developed independently at Third Way. It does not carry the blessing or the input of either the Administration or the business community.
Second, many blog postings have misleadingly characterized our proposal as a "bailout" that lets banks completely off the hook for their failures in the financial crisis. Again, not true. Our proposal requires banks to create an expedited process for mortgage modifications -- including principal write-downs and appropriate legal remedies -- for every homeowner who has been damaged by the banks' paperwork transgressions. This is a tough remedy and is far better than what homeowners are getting now. All too many homeowners are stuck in limbo for months, waiting for the approval of a modification or short sale so they can rebuild their financial lives. In addition, we propose that the newly created Consumer Financial Protection Agency oversee this process and create uniform and enforceable servicing standards -- including foreclosure processes -- that all banks must adhere to.
We also propose to bar certain paperwork-related lawsuits -- but only in those instances where a property has been abandoned or in default in excess of 18 months. We propose this because it serves no purpose to allow litigation to delay foreclosures that are truly inevitable. Such delays would only undermine the stability of the housing market by leaving abandoned properties to continue to bring down neighboring home prices and calling into question legitimate short sales and purchases out of foreclosure. Moreover, allowing unfettered litigation could have disastrous circumstances. For example, taking the Ibanez decision to its next logical step, can modifications and short sales agreed to by a lender be later challenged (e.g. by an investor or the originating lender) if there is a gap in the paperwork assigning the loan to the party that agreed to the modification? This could spell terrible news for responsible homeowners.
In conclusion, we want to reiterate the healthy respect we have for those who work hard every day in sorting out policy problems, educating the public and finding solutions for the financial crisis we all find ourselves in. Given these stakes, the debate should be a fair one that debates proposals on their merits, not on faulty assumptions.
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