Further, I point to statistics showing that people who get mortgage help continue to fail to pay their mortgages. It does no one any good to cut a person’s bills in half if they can only pay a quarter of them.

There has to be room for failure, or there is no downward pressure on prices. When there is no downward pressure, people selling houses love it, but people buying houses don’t. When there is a price collapse, it’s just a buying opportunity.

People who have too big a mortgage should welcome the opportunity to face reality and get out of it. Instead, we are granting many of them the continued misery of chasing the unattainable.

When the concept of securitization was first presented to us in the late 1970’s we missed the fatal flaw. While government policies greatly exacerbated the problem with its insistence that lenders provide financing to people literally without income, the flaw lies with securitization itself. What it did was to remove the appraisers from accountability to the eventual holder of the mortgage.

In the old days, mortgages were issued by local lenders. First, local lenders had some sense of what homes were worth. An unrealistically high appraisal would attract the attention of the local lender. If the lender began to lose money on mortgages, where the appraisals in retrospect consistently overestimated the market, the appraiser would soon be out of business.

With securitization, not only does the investor on the East Coast who ends up with the mortgage not know what a home in Broad Ripple Indiana is worth, but the home there is only a part of a package of thousands of mortgages. The lender will NEVER know who the appraiser is, and doesn’t hire him in the first instance.

The appraiser is hired by the mortgage broker or mortgage initiator. The broker only gets paid on closed loans. The higher the appraisal, the happier the seller is. As a practical matter, the broker has already determined how much the buyer can pay and the transaction is already on the table when the appraiser enters the picture, so the appraiser needs only to in effect approve the transaction that has been negotiated. The more of these he/she approves, the more business the broker pushes his/her way. All of the biases in the system are in the direction of generating higher appraisals. This is where we are dealing with people who are trying to be honest.

You can only imagine what the situation became when the seller, broker and appraiser were dishonest. The structural brake on this that existed in the form of the local banker who had some information and who would be burned was gone. In large part this explains the engine that drove the appraisals higher and higher. Even among the honest appraisers the bias caused them to seek support for higher and higher numbers.

The proposals to write down mortgages to the current value of the property simply put the process into reverse. The mortgages are still held by the same absentee lenders who are without knowledge of the market. The situation is even worse, because the party with the nominal interest adverse to the seller (the buyer) is absent. Aside from the remoteness of the lender, if the federal government in any way provides a subsidy for mortgages that are written down, then the actual remote lender has no dog in the fight.

This is true even if we put these things into bankruptcy court. For many years we allowed “cram downs” on motor vehicles. A “cram down” on a house is different from a “cram down” on cars and trucks. A 2006 F150 is a fungible item with a blue book value. A home is unique and the appraisal of the home is a one time process without anything like a blue book. The pressure in this situation is all downward.

What makes the matter worse is that as houses in the neighborhood go through this process more and more houses will lose value. A cascade of houses going through this process is likely. With each transaction comparables of lower and lower value will be available, and the trend of the market will be down. That makes it reasonable for an appraiser to factor the market trend lower and lower.

What makes this all the more frightening is that the system has not been changed in a way to make a difference. Currently, in an effort to control appraisers, mortgages require not one but two independent appraisers. This makes it more difficult for a single appraiser to wander too far up or down. But nothing has been inserted into the system to replace the relationship between the old savings and loan that held the mortgage and the appraiser. There is no downside for an appraiser who over or under appraises a property in a knowing or unknowing effort to satisfy his/her employer.