Mortgage Mods: A Modest Proposal to Avoid Moral Hazards

Gretchen Morgenson of The New York Times wrote a recent column advocating what she calls a "bold idea" for housing policy instead of the crash that many economists now appear to want. The main thrust of her column is that TARP and other attempts by the federal government have been bad ideas aimed more at keeping big banks afloat than helping homeowners, that there is a moral hazard of rewarding those who took on unreasonable risk. Morgenson says there's a better way to deal with the crisis in housing: mass refinancing.

Citing the work of two Wall Street veterans, Thomas H. Patrick, co-founder of New Vernon Capital, and Macauley Taylor, principal at Verum Capital, the plan Morgenson mentions calls for refinancing all the nonprime, performing loans held in privately issued mortgage pools (except for Fannie's and Freddie's) at a lower rate. "The mass refinancing could have helped borrowers, while retiring mortgage securities at par and thus helping pension funds, banks and other investors in those pools recover paper losses created when prices plummeted," she writes. "Fannie Mae and Freddie Mac could have financed the deal with debt."

Maybe I'm just far too cynical, but ... how is this not moral hazard of the first order?