Nationalization is scary, but so is the alternative: The malaise and mismanagement we have witnessed since the financial system started breaking down last summer.  US Government looks to quell nationalization fears; FDIC says additional mortgage relief and financing aid will hinge on stress test without nationalization yet taxpayers have invested billions bailing out subprime lenders and banks, with precious little to show for it.

Can nationalization be much worse?  Granted, there are great risks to nationalization. For starters, there is the basic philosophical quandary. It’s tough for a country to take over a large swath of its banking sector and still tout itself as the first, best bastion of capitalism.  Execution risks abound too. University of Chicago business school professor Raghuram Rajan notes that nationalized banks would be subject to political pressures. They might weaken the economy by keeping failing companies alive. And nationalization would amount to a government rescue of bank bondholders, who don’t deserve the help.  The economic arguments are persuasive. But they ignore policy realities that indicate a well-managed and limited nationalization effort could be a net benefit. Nationalized banks could serve broader interests, such as increasing lending and providing mortgage relief.  The effort to spur mortgage lending has had little discernible effect on private-sector banks.

Taxpayers have invested $350 billion in the bank bailout so far, with $350 billion more on the way. The money has not had the intended effect of spurring lending or eliminating so-called toxic assets. One sign of how this could be different came from Great Britain. Northern Rock, a bank nationalized last year by the British government, on Monday announced a plan to write $7 billion in new mortgage loans this year and nearly double that next year.  Read complete article by David Greising. 

Alexendria Craig is about to lose her home after taking out a series of high rate mortgage loans that left her deep in debt. She says the home loans “helped balance out what she fell behind on with her delinquent mortgage payments. Her salary as a paralegal for Los Angeles County was not enough to make ends meet. Desperate to hold onto her house, she responded to a slick advertisement that turned out to be too good to be true.  Craig agreed to pay $30,000 and to share title on her home to a foreclosure rescue company. The mortgage relief company promised they would use home equity in her house to pay off her high rate debts and that they would make sure that her credit would be repaired. After a year she believed that she would get her property back.

The foreclosure prevention company’s agreement promises that clients have “sufficient equity in your home” for “paying off debt liability,” “repairing your current credit,” and most importantly that they’ll “remain in your home without further concerns or worries.”   It’s a classic foreclosure rescue scam, says attorney Debra Zimmerman.   “There should be a huge red flag for anybody who offers to do this for money, because there is no reason to pay for help,” said Zimmerman, of Bet Tzedek Legal Services. She said “loan modifications could be done for free,” but Loan Modification Buzz reminds you that “you get what you pay for.”  If you seek formal mortgage relief, seek legal advice from an attorney-backed loan modification company.  Seek counsel from foreclosure lawyers who understand state laws regarding foreclosure, debt relief and loan workouts.

In the typical scam, the homeowner transfers title to a third party who promises to secure a lower interest rate on the mortgage. But what often happens is the third party cashes out the home’s equity, leaving the homeowner as a renter.   “This is the American dream, and they’re losing it. And somebody is coming and they’re going to rescue them,” Zimmerman said.

In California so many people have fallen for these foreclosure prevention scams the attorney general has issued a consumer alert. But that warning came too late for Alexandria Craig. Her house is in foreclosure, and next week she’s facing eviction. Both the foreclosure rescue company and the bank foreclosing on her house deny any wrongdoing.  “You feel like you’re drowning and you feel like there’s nobody sending you a life raft,” said Craig, sobbing.  Barring a miracle, Craig says she’ll be moving into her car on next week, losing family memories and her American dream.