A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a satirical look at marketing and business.

Latest news has it that the Treasury Dept. is thinking really hard about maybe using some of the $700 billion from the Troubled Assets Relief Program (TARP) to do something about home foreclosures.

Neel Kashkari, who has to administer the Troubled Assets Relief Program, told Senators, “We continue to aggressively examine strategies to mitigate foreclosures and maximize loan modifications.” It is well worth noting that Kashkari offered no actual details as to what this might mean.

This doesn’t seem to indicate any change in Henry Paulson’s willingness to consider an FDIC plan to help homeowners. “Under the FDIC proposal, the government would seek to encourage lenders to modify loans by offering to share the cost of any defaults. The FDIC has said its proposal could prevent about 1.5 million foreclosures.” Paulson has said that use of TARP money for this would be a misuse of the funds. This is odd given his willingness to spend the money on just about anything except homeowners.

LATE UPDATE: NYT reports Ben Bernanke sketched out a range of options, including buying delinquent mortgages in bulk and refinancing them into government-backed programs, writing down the value of a loan’s principal amount in “cases of badly underwater mortgages,” to reflect the decay in real estate values, and bolstering a program run by the Federal Deposit Insurance Corporation that seeks to lower homeowners’ monthly payments on delinquent mortgages.

Fortunately FDIC chair Sheila Bair does seem to be the only major player in all this concerned with only helping homeowners. And she wants to know how we will get out of all this, too. On Tuesday Bair said that if the government doesn’t devise a way out of its massive financial rescue plan it runs the risk of  becoming a crutch for banks and other institutions over the long term.

“We really need to think through the exit strategy because (government guarantees) could become a crutch,” she said. Weaker financial institutions “need to be allowed to fail,” Bair added.

Bair certainly does seem to be leaning towards some sort of plan built around the Bank of North Dakota model. What’s that, you ask?

Maybe it’s time to try something new. Maybe it’s time for state governments–with federal help–to start some new banks with clean balance sheets that can begin lending on the day they open their doors. There is precedent for this.

There is the Bank of North Dakota. The BND was established by the state of North Dakota, which owns it, in 1919. The reason for its existence is that the farmers and small businessmen of the state were confounded by the same impossibility to secure loans back then that has frozen the nation in place in 2008. The banks were not lending, so the state started a bank which did lend and does to this day. It is making student loans and other kinds of loans that are unavailable elsewhere. The bank is the depository institution for the State of North Dakota’s funds and it also accepts deposits from ordinary people and businesses. Since it is a socialistic institution, not intended to make a profit, it does not have a motive to misbehave, as our private enterprise banks have done.

Any state can start its own bank using the funds it has deposited in private banks. That comes to many billions, and withdrawing so much money at one time could be all that is needed to send any number of banks into death throes. So the switchover would have to be carried out gradually with the federal government, which is so free and easy with its cash, supplying the startup money. (Nepotism alert: author of the above is Nick von Hoffman, my father.)

The BND is a non-profit with very limited services and is not FDIC insured, so it isn’t really a competitor to the commercial banks. It is worth noting that the BND has never in 90 years lost money.

In the spirit of bipartisanship — and common sense — why didn’t Bair get a Cabinet post?

Source [blownmortgage]

Share This

This entry was posted on Thursday, December 11th, 2008 at 8:00 pm and is filed under mortgage industry. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.