After bailing out banks, investment houses, a big car loan company and AIG insurance (twice), the federal government finally may be getting around to individual homeowners. It’s about time.
After all, it was failing mortgages that fueled this fall’s financial crisis; fixing them ought to help everyone involved. But Treasury Secretary Henry Paulson and other Bush administration officials, while happily bailing out Wall Street, have been slow in getting around to the residential streets where actual people actually live.
The Federal Deposit Insurance Corp. has a plan -- already in effect at IndyMac, the Los Angeles-based bank that the FDIC seized in July -- that reworks troubled mortgages to make them affordable. If the reworked loan subsequently defaults, the FDIC shares the losses.
FDIC chairman Sheila Bair wants to take the plan national, using $40 billion to $50 billion of the $700 billion bailout package passed by Congress. That would save 3 million to 4 million homeowners from foreclosure.
It’s a good plan, although it’s drawing some resistance from the Treasury Department, and the White House isn’t on board yet. President-elect Barack Obama, while not explicitly endorsing Bair’s plan, said last week that "It is critical that the Treasury Department work closely with the FDIC, Housing and Urban Development and other government agencies to use the substantial authority they already have to help families avoid foreclosures and stay in their homes."
The Bair plan is progress. But it alone will not solve a maddening paradox: Lenders often lose more money by foreclosing than they would by modifying a mortgage to make it affordable. Yet the mortgage industry keeps foreclosing when it should be modifying, and families keep losing their homes needlessly.
Meanwhile, the glut of foreclosed properties accelerates the decline in housing prices. Falling home prices then make it harder to put a floor under the price of mortgage-backed securities, which are burning holes in bank balance sheets. Those burning balance sheets stoked the financial crisis. It is a vicious cycle that must stop.
Why is reason so elusive? The mortgage industry gets part of the blame. It was slow to recognize the impending tsunami of foreclosures, staying with the foreclosure machine for too long. But some foot-dragging comes from mortgage-servicing companies, who often are paid more to foreclose than to work with a homeowner.
Red tape often trumps reason. Millions of loans are packaged into mortgage securities, and each of those securities packages may have hundreds of owners. Modifying the specific mortgage contracts within those packages can be all but impossible. Congress is going to have to step in and make it easier to change those contracts.
In the meantime, JP Morgan Chase and Bank of America are trying other rescue plans for loans they inherited from sick financial institutions.
Government foreclosure policy always has been a step behind the crisis. First came a voluntary agreement with lenders to modify loans in limited circumstances. That had little impact on the situation. Last summer, Congress passed a $300 billion plan to allow the Federal Housing Administration to refinance loans for borrowers if lenders agreed to take a partial loss. But that program only now is getting started.
Good policy should recognize that some delinquent homeowners cannot be saved. Some, lured into adjustable rate loans by unscrupulous brokers, have too much house and too little money. The IndyMac plan, for example, would reduce payments to 38 percent of income, but even that amount wouldn’t work for some homeowners.
About 4.3 million Americans are expected to lose their homes between 2008 and 2010. The consequences are bad for all Americans. It’s worth investing tax dollars to break the cycle that has plunged the nation into recession.
