Editorial - Moving Ahead on Mortgages

October 28, 2007
New York Times

There have now been two "drumroll please" rollouts of plans to help rescue the economy from the worst effects of the housing bust. Each has only raised more questions about the best way to move forward.

Countrywide, the nation's largest mortgage lender, pledged to help some 80,000 borrowers, and potentially many more, restructure their mortgages to avoid foreclosure. Countrywide seems to envision a loan-by-loan process, however, which would be too slow to keep up with imminent defaults and could all too easily result in inconsistent treatment of borrowers.

The Treasury Department has blessed a plan by Citigroup, Bank of America and JPMorgan Chase to form a fund to buy some mortgage-related assets. Banks could avoid having to sell those assets at fire-sale prices and avert losses that could tighten credit for everyone. But the banks seem to be having trouble raising money for the fund. Mortgage-backed investments don't seem so enticing when more foreclosures are coming.

There is a valuable lesson in the floating of these two balloons: Until there is an overarching solution to the coming wave of foreclosures, estimated at 500,000 to 2 million by the end of 2008, individual efforts like Countrywide's will be overwhelmed. And investors are unlikely to re-enter the market for mortgage-backed securities no matter who is urging them to do so.

Fortunately, the Federal Deposit Insurance Corporation has come up with such a solution. It has made a compelling case for freezing the introductory rates, typically 7 percent or 8 percent, on the most default-prone adjustable-rate loans. To qualify, a borrower would need to live in the home, be current in monthly payments and not yet have faced an increase in the loan's rate.

The plan would remove up to 1.75 million people from the ranks of future defaulters. And most of them will default, if faced with sharply higher rates. Helping those borrowers would free up money to resolve tougher cases: people who are already delinquent and those who may not be able to afford a loan even if it is modified, and may need help finding alternative housing.

A logical vehicle to further the F.D.I.C. plan is Hope Now, an alliance of lenders, loan servicers and investors formed this month to work on ways to avoid foreclosures, and recently endorsed by the Treasury. What is needed is high-level executive leadership to persuade the group to carry out the F.D.I.C. proposal, and as luck would have it, high-level executive leadership is the forte of the Treasury secretary, Henry Paulson Jr. There is little doubt that Mr. Paulson could achieve a melding of Hope Now and the F.D.I.C. plan.

To date, the Treasury has seemed mostly concerned that moving forward in a big way on any front in this complex situation could have unintended consequences. But the consequences of doing nothing substantial are worse, including mass foreclosures that undermine the financial system and impede the markets' recovery, possibly spawning a recession.

Treasury's leadership is also needed to cut through the arguments that have impeded forward momentum for too long. A typical reason for inaction is that loan modifications open the door to lawsuits, because it is impossible to alter a loan in a way that will benefit all of its investors. But federal regulators have issued guidelines clarifying those complex liability issues, which, if followed, would allow for widespread loan restructurings without fear of being sued.

The F.D.I.C. has a good idea. Hope Now is a good idea too. Together, they could provide real hope.