In an uncharacteristic display of public solicitation, the U.S. Department of the Treasury and the U.S. Department of Housing and Urban Development (HUD) has requested the assistance of the American people to unravel the knot of the U.S. housing finance system. The federal government hopes this appeal for help will generate substantive input from academic experts, industry groups, market participants and consumer organizations.

To help guide the discourse, the government crafted seven questions to be considered by respondents. The questions, which read like essay prompts for an introductory economics course, cover everything from the federal government’s role in supporting a stable housing finance system, to whether the housing finance systems of other countries should be emulated.

The Administration is poised to receive public input through the submission of written suggestions at www.regulations.gov and in multiple public forums to be conducted across the country.

first tuesday take: This is a charade and nothing more. The government knows precisely what it needs to do to correct the housing finance system – it’s just not exercising its power. And since power is operated on a “use it or lose it” basis, who will be the leader to step into this power vacuum and provide legitimate direction in the face of this laughable façade? A California member of Congress? Not John Q. Public…

There are two ways to reconstruct the housing finance system and they’ve been available and known to the government all along. First, impose prudent lending regulation to force lenders to stay solvent by barring them from taking socially unacceptable risks which endanger our nation’s institutions. This means limiting the availability of toxic mortgage products such as any type of adjustable rate mortgage (ARM) – first permitted by the U.S. Treasury in March 1982 – and promoting adherence to conventional forms of financing.

Second, Congress must restore the authority taken from bankruptcy judges pre-2006 at the height of deregulation. This action will allow judges to again cram down the principal balance of a loan to 94% of the current value of a distressed property – a homeowner’s only chance at a sustained financial rehabilitation.

Instead of going through the motions of helping by sending the dialog into the committee of the public, the government must actually help. This town-hall approach is a poorly-colored paper-mâché reaction to a very well understood problem. It will do little for the public (beside provide some idle entertainment) and delay the righting of lender portfolios and stall the real estate recovery.

The stakes for owners of all types of property and their brokers are high, and delay is worse than any action that may turn out to be wrong. The illusion of help for homeowners by loan modification doesn’t get us anywhere at the end of the day. For proof of the stakes, look no further than Japan and Mexico and how they failed to properly handle their private bankers in those countrys’ most recent financial crises, failures which still adversely affect the real estate markets and economies in both countries today – some 20 years on.

Click here for a copy of the press release published by the U.S. Department of the Treasury and the U.S. Department of Housing and Urban Development (HUD).

In re: “Gov’t seeking input on home loan future” from the San Francisco Chronicle