Foreclosure Salvation: By Grace or By Works?

With a speech given today in Philadelphia, Sen. Hillary Clinton reinforced her standing as the presidential candidate with the most far-reaching and concrete proposals calling for government intervention to save homeowners from the sins of greed and bearing false witness that were rampant in mortgage lending over the past few years.

The payment for those sins is often foreclosure, but Clinton wants the government to become a Messianic figure for homeowners facing foreclosure — and by default also for many lenders who approved problem loans for those homeowners — by forgiving these sins and bearing the transgressions of malevolent mortgages that no other lender or buyer is willing to touch.

"That’s why I believe the Federal Housing Administration should also stand ready to be a temporary buyer — to purchase, restructure, and resell underwater mortgages," Clinton said in the speech at what was billed as the "Solutions for the American Economy" event.

Giving the FHA the ability to buy trouble mortgages would act as a safety net to legislation proposed by fellow Democratic Sens. Barney Frank of Massachusetts and Chris Dodd of Connecticut.

"The Frank-Dodd legislation would ... (set) up an auction system for mortgage companies that hold hundreds of thousands of these mortgages. Through this system, these companies could sell mortgages in bulk to banks and other buyers. The buyers would be willing to purchase these mortgages — and restructure them to make them affordable for families — because they know the government will guarantee them once they are refinanced," Clinton said, not long after setting up the problem by citing RealtyTrac's statistic of 2.2 million foreclosure notices filed in 2007, up 75 percent from 2006.

But because she doubts the sufficiency of this plan to help all homeowners, Clinton called on President Bush to form an "emergency working group on foreclosures" to step in and evaluate the plan along with her proposal to have the "government step in as a purchaser."

Clinton believes that her proposal to allow the FHA to purchase loans "would cost taxpayers nothing in the long run" because it would not create a new federal bureaucracy and would be designed to be "self-financing over time." Whether that is a realistic belief is questionable based on the tendency of government programs to overreach and overspend. 

The bottom-line question is this: Should government act as a savior willing to take on the foreclosures of the world, or should it take a more tough-love approach and let the market work through the consequences of its actions? Let us know what you think.