With four of America’s biggest banks postponing mortgage foreclosures in 23 or more states, the administration of Barack Obama has some decisions to make.

Will it back the banks in an attempt to maintain the economic recovery or come down on the side of the many Americans currently facing foreclosure troubles? High-ranking politicians are stuck weighing their options and choosing between two potentially polarizing decisions. For an administration that has, at times, sent mixed messages about where it stands on policing banks, the foreclosure freeze is turning into a hot-button issue.

Option 1: Punish the Banks

No matter what lawmakers decide to do as a result of the foreclosure freeze, the U.S. housing market will end up taking a substantial hit. But will anyone aside from the economy and homeowners pay the cost?

If some members of Congress have their way, banks will be punished for their alleged bad behavior. The way the government could hurt banks is by enacting a nationwide moratorium on foreclosure sales. This would bring the foreclosure filing departments of banks across the nation to a halt and put a damper on the income banks earn from flipping foreclosed properties.

Slapping banks’ wrists would be primarily a show of strength by politicians looking to garner additional votes in November mid-term elections. The large subsection of voters that is displeased with the seemingly cozy relationship between politicians and banks might be satisfied if they see lawmakers taking steps to scold banks for their lack of foreclosure filing oversight.

The most notable politician seeking a nationwide stop to mortgage foreclosures is U.S. Sen. Harry Reid (D-NV). Reid, the Senate Majority Leader, is embroiled in a tight race against Republican Sharron Angle in a November mid-term election. President Obama and some other influential lawmakers are against freezing foreclosures nationwide.

Option 2: Let the States Sort it Out

The action favored by the Obama administration is a more hands-off approach to handling the crisis. If the President has his way, attorneys general from each state will be allowed to investigate banks’ mortgage foreclosure filings and make individual judgments on whether to pursue further action. This is the approach states have taken over the past month. Since Ally GMAC in September was first hit with accusations of improper foreclosure filings, the 23 states in which foreclosures are controlled by the courts have moved to prevent banks from making any more seizures. These probes could expand to more states later this week, but the federal government would stay out of it in this case.

This approach to fighting the foreclosure freeze might be the one that would benefit the economy more in the long run, an important consideration for a Democratic administration facing a steep climb to reelection two years from now. The economy — and the government’s inability to shift its course — has been the single biggest issue of the Obama presidency, and if the economy does not begin to make gains, the President could face serious issues in the 2012 election.

One reason lawmakers might stray from enacting a countrywide moratorium is the fact that plenty of legal foreclosures would probably be stopped as a result. David Axelrod, one of Obama’s top advisers, mentioned in a Sunday interview with CBS that there are probably valid foreclosures that would be halted if the administration put its foot down.

Crisis Hits at an Inconvenient Time

The last thing the Democratic party needed heading into November’s tense mid-term elections was another hit to the economy and housing market. Potential swing voters who might lean to the conservative side of the spectrum are typically tired of Democratic leaders’ failure to turn the economy around. If Obama issues a nationwide foreclosure moratorium, these voters might see the move as another anti-business step by the Democratic White House.

The other segment of voters Democratic politicians must worry about is made up of citizens who supported Obama’s run to the presidency but have since grown sour on what some might consider pro-bank or pro-business measures. A decision by Obama to back the banks could convince these voters that the Democratic party is placing the interests of big business over the interests of the populace.

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