Banks screwed up. Their shoddy documentation and flawed procedures surrounding their mortgage business has led to many halting foreclosures while they clean up the mess. Should they consequently offer additional, more aggressive mortgage modifications as a result? That's the growing call from progressive circles. Yet there's no logical connection here: banks may have been negligent in their bookkeeping, but that doesn't suddenly mean defaulted homeowners are suddenly reincarnated as creditworthy borrowers who can now afford their houses.
This flawed concept is coming from a few different directions. Out of Congress, Rep. Maxine Waters (D-CA) is using the new crisis as support for a bill that would require all banks to offer borrowers modifications before foreclosure. Separately, blogger Tim Fernholz of the American Prospect says that if there's a new bank bailout needed due to this mess, then modifications should ramp up:
But, to borrow a phrase from a certain former White House official, in every crisis there is opportunity. The revelation of this negligence offers the Obama administration and Congress an opportunity to capitalize on the lessons of TARP. Namely, if the public once again steps up to bail out the banks, we will get something -- something big -- in return.
Ezra Klein of the Washington posts echoes this call in the introduction to his daily (and quite good) Wonkbook newsletter today. He thinks cramdowns, where bankruptcy judges reduce mortgage principal to keep defaulted borrowers in their homes, would be a particularly good response. He also suggests ramping up rent-to-own programs.