09/26/2012 04:34 pm ET Updated Nov 26, 2012

A Cost Free Solution to the Sub-Prime Mortgage Mess

Proposed government schemes to bailout banks (again), homeowners, and Fannie Mae and Freddie Mac with refinancing programs for underwater homeowners, subsidized debt service, government guarantees, and home rental support have not and will not work. They are unaffordable, divert scarce funds from more productive job creation uses, and compound the national debt crisis. People need decent jobs and relevant skill training, not handouts which only postpone the inevitable reckoning and prolong the crisis.

It is not the purpose, duty, or obligation of government to: (a) bailout the mistakes and bad investments of the private sector whether they be business or individual or (b) enable elected officials to devise policies and/or proposals that pander for votes or campaign support from special interests at public expense.

A government "hands off" subprime home mortgage policy would save taxpayers billions and make housing affordable through revaluation to real market values. This would be achieved through the judicial system: (a) via the bankruptcy and foreclosure processes or (b) by negotiated arrangements or debt restructuring between lenders and homeowners in lieu of foreclosure, without government intervention, subsidies or grants. The banks, servicers, Wall Street, hedge funds, speculators, and rating agencies have made fortunes out of the housing bubble and the subprime scams and its time they took a "haircut." The perpetrators of the frauds must be prosecuted and pay restitution.

The simplest, cheapest, and best solution to the subprime crisis (and the personal debt overhang problem) is to change the bankruptcy laws to permit and facilitate judicial cram-downs on underwater home mortgages to market interest rates and values and limit fees, penalties, and legal costs through the restoration of the former usury limits of 6 to 7 percent for interest and restore former personal debt forgiveness regulations. This would:

1. Not cost the federal government anything, not add to the national debt, reduce government involvement, and place responsibility and cost on the culpable private sector parties where it belongs;

2. Give mortgage lenders the options to (a) voluntarily restructure mortgages for financially responsible underwater homeowners by reducing the mortgage principle and/or debt service to market and extending the maturity or have the courts do it in the event of default and write off the costs - eliminating government subsidies, (b) foreclose on homeowners who are unwilling or unable to meet market reevaluation of debt service or pay real estate taxes, (c) facilitate foreclosure and save costs by allowing at risk, financially responsible or temporarily unemployed underwater homeowners a rental deal with a future right to repurchase their property at the remaining mortgage principle amount if the terms of the agreement are met, (d) rent to former homeowners or new parties, (e) resell the mortgage or the property or gift the property back to local government for public auction when and if it regains possession or gets ownership and write-off loss, (f) create off-balance sheet entity for toxic loans for later sale as market conditions improve, (g) establish a program to give returning servicemen and/or disabled military veterans priority or special deals to rent or purchase foreclosed or repossessed housing by offering tax incentives to lessors or sellers;

3. Maintain the tax base of communities and stabilize neighborhoods.

**Furthermore, it is insane and shortsighted to destroy viable housing stock to reduce real estate tax obligations and insurance costs or avoid maintenance on repossessed property.

**Freddie Mac and Fannie Mae: Reduce the interest on their mortgages to the same rate charged banks by the Federal Reserve Open Window Facility and convert the balance of the debt service to amortization to pay off the outstanding loans of these government sponsored (and federally supported) entities whose existence would be unnecessary using proper due diligence standards.