Maybe the House Republican bailout proposal is worse consideration

An Associated Press article by Julie Hirschfeld Davis and David Espo entitled "Rep. Barney Frank predicts bailout deal by Sunday" on the status of the financial bailout negotiations says that House Republicans "demanded 'serious consideration' for a plan of their own, involving less government intrusion and lower cost to the taxpayers than the $700 billion that Treasury Secretary Henry Paulson has been seeking" and that the Republican plan would provide that "the government would insure the distressed securities rather than buy them. Tax breaks would provide additional incentives to invest." I think the concept of leaving the mortgage securities in place and offering government insurance could work and should be considered by Treasury (for about 30 seconds), but I suspect that Wall Street would profit more greatly from such insurance than the taxpayers would profit from the majority of mortgages that can be made workable by Treasury if they can be bought with a steep haircut and then the terms of the mortgages adjusted to permit the homeowners to avoid foreclosure. But if the insurance is a premium that Wall Street would pay over a number of years and would be calculated to completely cover a realistic estimate of foreclosures, it could still be attractive to taxpayers. Still, I think the real point is that the only way to avoid a large number of foreclosures that the government would cover is to modify the mortgage terms in the near future. Simply letting mortgages foreclose and then having the taxpayers pay the full cost of something than even now can be avoided is just plain silly.

One element of any mortgage modification plan that I would like to see is that if the government reduces the principal owed by the haircut discount at which the mortgages or securities are purchased, then the government should then own that portion of the proceeds should the homeowner eventually sell the house at a higher price than the discounted principal. This would assure than post-bailout homeowners do not get a completely unfair windfall compared to homeowners who are still paying on their full principal. In fact, maybe the government could offer such a principal buyout deal to other homeowners as well on a case-by-case basis. It could actually turn into a win-win for all parties involved. In truth, the party taking on the bigger risk would be likely to win the most, and that could in fact be the U.S. Treasury.

-- Jack Krupansky