Party like it's 2003: Housing Do-Over

Our current economic fiasco started as a housing bubble. Real estate prices rose to unsustainable levels because those seeking to diversify their holdings by buying real estate were bidding against those seeking homes for their families. (Personally, I think that too much money in too few hands caused the problem, but I can only judge by what I saw here in SW Florida.) Hand-wringing and finger-pointing help dispel our anxiety, so I would expect the silly ranting and ignorant bluster to continue for some time. As we emotionally recover, though, we're in one of Naomi Klein's shock crisis enabling the greedy to make another grab--and boy, are they grabbing! We need another solution, and it must be drastic. Afloat in a sea of relativistic market values, we should have a do-over: set a standard starting value that can be used to make more prudent judgments of these toxic assets.

Too many innocent people are paying for the sins of others and I really want it stopped. In days of yore, a mortgage was a long-term relationship where originating bank serviced the note over its lifetime regardless of whether or not they assigned the payments to a third party. The bank required sufficient collateral, and approved loans based upon impartial assessments and realistic criteria of ability to repay. Buildings and land are almost always taxed, so the vast majority of our communities maintain databases for ad valorem taxes. Why not use the assessments set by the local municipalities to fairly re-set housing prices?

Set 120% of local government's assessed market value at 12/31/2003 as a national benchmark. That year was at the end of a mild recession, but before bubbles reached a fever pitch. Our currency has been devalued by about 20% in the years since if we use the Social Security Administration's cost of living adjustments, so a 120% adjustment of that figure should be close to a present "fair market" standard value. Set a standard "2009 starting price" for ALL of our nation's property, and adjust each and every mortgage to no more than that value. Let's call this number the 2003 Do-Over or TTDO.

Each and every mortgage note currently outstanding should be examined for principal balance at 12/31/08, and that balance compared to the TTDO. The principal amount due for every lien against each piece of property on the books should be reported to the appropriate authority electronically as of 12/31/08. Any liens that don't report at least a $0.00 balance will be wiped from the city or county records and the bank or holder of record loses any future claim on the property. Mandate that each and every bank write off 60% of any excess principal that they imprudently agreed to underwrite.

Then allow a three-to-six month period where any party to the note may renegotiate its terms, allowing market forces to prevail. If the two parties do not renegotiate the note, it will be paid in full years earlier than the original terms and the holder must so notify the borrower.

Capitalism thrives when buyers and sellers have equal power, so having many medium-to-small banks should be much preferred over a few large ones. Having one standard to judge the outstanding mortgages would allow us to get rid of the banks who abandoned prudence and have been insolvent everywhere but on paper.

How do we pay for this? The federal government will subsidize $20 per property tax bill to each municipality to cover the cost of generating and mailing a TTDO statement to each property owner and lien-holder of record. Reward each bank or S&L who physically holds the note with a one-time tax credit of $20 per mortgage (maybe this will encourage some banks to buy back their own loans). Other holders in due course are on their own as this is a cost of doing business in an unregulated area. The main federal government bailout during this crisis should be to freeze tax rates at current levels while mandating changing the base to the 2003 Do

The cost should be borne by the financial markets that created the problem (a tax credit of $20 per mortgage held should cover it to avoid penalizing the innocent).

Those uninvolved in imprudent acts will see no change at all to their notes and/or home equity lines. Most homes will decrease in value on paper to a firm amount that has been verified; very few innocent people would suffer any real effects. Those who speculated will be upside-down on their mortgage, but they won

Mandate a tax rate moratorium for two years. If the rates stay constant and the assessments are re-set, local revenue will decrease. The front line of the federal government response to the crisis will be to lower all property taxes and to subsidize the difference between the gross tax revenues received in by the municipalities under the lower assessment level. Rather than being a top-down solution, the bailouts will be spent at the local level to maintain essential public services and where there should be better control and auditing at work.

If property taxes decrease significantly for two years, rents can fall more quickly for vacant properties as this has a windfall effect, encouraging all landlords to either leave rents at current levels or to decrease them as they expire to retain tenants.

Void the AIG contracts against these fraudulent assets based on deceit and used to obscure the underlying values; require AIG to refund 85% of all premiums paid over the past five years on such contracts.

At least some of these ideas would work an awful lot better than most of the garbage that I've seen and heard proposed over the last three months. Would somebody please just start doing something that will ameliorate this crisis? Please?