The Forgotten Man, Again

This post is by my husband and was originally published on The Corner at NRO.

The post facto debate over the President's Mortgage Bailout is the clearest example of Forgotten Man syndrome I've yet seen. It is always talked about as if there are only two parties to the loan: the borrower and the bank. The borrower is portrayed either as victimized (Michelle Malkin has a great example here of a bus driver who is underwater on a home she paid $800,000 for) or foolish (the same clip can be viewed through a different lens), while the bank is portrayed either as predatory (the bus driver complains that the bank made it "too easy" for her to borrow money) or foolish (again, the clip can be viewed through a different lens). What's missing in all the talk is the forgotten man — the actual current holder of the loan.

As we all know, the banks didn't keep the loans after they originated them. They packaged them up and sold them on; they now merely service them. So, when Obama wants banks to renegotiate terms with the borrower, he is saying that the banks have to break their duty to the current investor, whose contract will be renegotiated without their having a say in the matter. As my colleague John Berlau says,

The Obama plan and Hope for Homeowners are subsidizing the banks that service the loans for losses that they often won't even take. The parties that are actually doing the loan forgiveness and should be paid, if anyone should be paid (and I don't think anyone should, because the government shouldn't be interfere at all) are the investors holding the mortgage-backed securities.

The contracts between banks and investors are usually pretty clear that it's either the original terms of the loan or foreclosure. They state that loans can only be modified for the best interest of the investor, if they even allow modification (which in the case of the Frey lawsuit vs. Countrywide, they apparently don't). The government is paying and pressuring banks to ignore their fiduciary duties and rip off investors, including pension and mutual funds with mortgage-backed securities that serve middle-class savers

Consider that investors aren't generally plutocrats, but you and me, via our pension funds, 401Ks and mutual funds, and the need for a Tea Party for the forgotten men seems even clearer.