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A more effective strategy would be for the government to target the source of the toxicity by buying actual loans, not the securities that back them. It could do so by taking ownership of entire mortgage pools, starting first with the lowest quality (and most toxic) ones.

With congressional authorization, the Treasury could force the purchase of these assets through eminent domain and make an immediate payment of an estimate of the loans' current fair value, which would then be later reviewed for adequacy by a judicial forum.

This approach has several advantages.

First, purchasing whole pools of loans would force liquidation of the mortgage-backed securities used to finance those loans. Investors would get an immediate distribution of the government's cash plus any residual interest that results from after-the-fact judicial valuation. Critically, whole issuances of the most complex mortgage-backed securities would disappear, and the market would receive strong pricing signals for comparable instruments.

A crucial component of this plan is that it moves whole loans (and not fractional securities) under government control. Once it holds these loans, the government can take charge of workouts and refinancings. This is the approach that the Home Owners Loan Corporation took in the Great Depression, and the Federal Deposit Insurance Corporation (FDIC) is already operating such workout programs for loans held by failed banks under its control.

If the Treasury bought these toxic pools, it could offer relief for borrowers who were misled or abused, and then deal more harshly with speculators. This strategy would empower the government to aid troubled homeowners, not just Wall Street.

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