I agree with Dave Dayan in The Atlantic and Natalie Earhart in The Real Daily who pointed to a painful truth. The Obama Administration simply failed to grapple with the mortgage crisis in a meaningful way.  

Indeed, when the country faced millions and millions of distressed mortgage loans, I think the President had only one viable option, which was probably too radical to be pursued or even discussed. The government needed to take control of the mortgage servicers. 

I speak from personal experience but anyone who ever dealt with problem loans will tell you the same thing. And the same rules apply to  $100 million loans and to $100,000 loans.  You cannot piggyback off of somebody else's due diligence.  And you need to know whom you are dealing with, because some people have hidden agendas.  

Here's what I wrote in Huffington Post in March 2010: 

President Obama will issue admonishments to the banks. Robert Reich says we should change the bankruptcy laws to allow for cramdowns. All well and good, but it’s unrealistic to hope that banks will fill the vacuum of leadership at the top. We’re talking about sorting out the problems of 10 to 15 million individual mortgage loans.  The financial incentives are too fragmented and too misaligned and too nontransparent for any private party to sort out the mess. Given the numbers involved, these mortgage problems are too big, and too interconnected, to be resolved on a scattershot basis in a dysfunctional marketplace.

If the government wants the job done right, it must do the heavy lifting itself.  Here are the three proposals to untangle the mortgage mess:

1. Perform due diligence on all borrowers at risk.

Step One is to find out what’s going on with each distressed borrower. It’s a very time consuming and labor intensive job, which is why no one wants to do it. It requires a face-to-face meeting with the borrower, plus independent verification of a borrower’s employment and income, his financial assets and obligations.  It requires figuring out if the borrower would be motivated to continue servicing the loan if it were reduced to an amount below the property’s current market value. 

Each delinquent mortgage loan is a multi-layered story.  Some borrowers took out mortgages as part of a flipping scheme. Some, who took out a loan they could not afford, were deceived by dishonest mortgage brokers. Others took out a fully-documented 80% loan on a house that lost 50% in market value.  All the evidence shows that mortgage fraud wen viral during the real estate boom.  

The root cause of the mortgage meltdown, and most other financial scandals, was that everyone piggybacked off of somebody else’sdue diligence, which was never performed properly in the first place. As a substitute, investors relied on credit ratings and financial models that were fatally flawed.  Now that millions of borrowers are in trouble, everyone acts as if the situation can sort itself out on its own. If we really want to take charge of the problem, the federal government should temporarily hire 50,000 people to perform actual due diligence on these borrowers and loans.  The private parties who contributed to the situation don’t have the same incentive to do things right. They’re conflicted.

2. Nationalize loan servicing for private label mortgage securitizations.

When mortgage loans are sold to securitizations, the loan servicing process is outsourced to a company that has no financial stake in the loans and has all sorts of incentives to play all sorts of tricks on the borrowers. The loan servicer is ostensibly acting on behalf of the security holders, who, because if different levels of subordination, have varied and conflicting claims.  The problem is compounded by the fact that none of the private label mortgage securities have standardized loan documentation or workout policies. The incentives are very different when a bank keeps a loan on its own books, or when Fannie Mae guarantees mortgage-backed securities. In those instances, one creditor has a singular financial interest in working out the best possible solution for a problem loan. 

By nationalizing this function, the federal government would be able to assure that the workout function would be done with honesty and integrity. 

3.  Create a transparent national registry for every ownership claim, including every derivative claim, on a mortgage securitization.

Here’s a very common scenario in loan workout negotiations. Several creditors agree to some kind of temporary forbearance to keep the borrower out of bankruptcy. But one holdout creditor shows no flexibility. He prefers to push the borrower into bankruptcy, even if it means  that the eventual recovery will be far less. The holdout owns a credit default swap, kept secret from everyone else, that will reimburse him immediately. With complex securitizations and credit default swaps, the opportunities for bad faith dealings in debt restructuring grow exponentially.   

The only way to achieve an orderly and fair workout process is to clarify who comes to the table with clean hands.

Once the government assembles the data of what’s actually happening, it can assert pressure to enforce an orderly and reasonable restructuring of America’s financial albatross.  

Of course, this approach holds political peril.  It’s easier to harangue against the banks than it is to take responsibility for the mess created by someone else. Any kind of government intervention is red meat for the tea bagging crowd.