The federal government could make this happen by entering into an arrangement with American banks that hold subprime mortgages, in which homeowners typically pay a low interest rate for two or three years then face much higher payments. Here's how it would work: The government would guarantee the principal of the mortgages for 15 years. And in exchange the banks would agree to leave their "teaser" interest rates on those loans in effect for the entire 15 years.

This would instantly give the lending banks new capital. As these mortgages would be guaranteed by the Treasury, they would suddenly be assessed, on bank balance sheets, at their original value - and a significant amount of the banks' lost capital would be restored. Plus, the banks would receive, from most of the homeowners with subprime mortgages, up to 15 years of teaser-rate payments.

By solving the bank capital crisis immediately, this strategy would ensure that fewer families would lose their homes, that fewer neighborhoods would deteriorate because of abandoned housing and that, as a consequence, there would be less downward pressure on local real estate prices and property tax revenues.

Read it all.

Filed under: * Economics, Politics • Economy • Housing/Real Estate Market

1. Charley wrote: Oh Heck Fire, let’s just ask the government to pony-up whatever cash is needed to cover late payments plus penalties and interest and call it even. February 7, 11:27 am | [comment link]

2. Wilfred wrote: Aggressive (i.e. unscrupulous) banks would hire friendly (i.e. dishonest) appraisers to make optimistic (i.e. inflated) appraisals of a house’s worth.  Then when the buyer defaults a few months later, you and I have to pay the bill for it.  Proposals like this one, which boil down to having the government pay for everything, just keep on a-coming.  This would be a milstein around the neck of our republic. February 7, 11:56 am | [comment link]

3. Irenaeus wrote: Sounds like a truly bad idea. The only losers would be . . . the taxpayers. Not to speak of how this bailout would encourage future financial foolishness. If banks find themselves short of capital (i.e., net worth or shareholders equity), let them sell new stock, as Citicorp recently did. It will do them good. February 7, 12:31 pm | [comment link]

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