Finally — MY Times Gets it — editorial Aligns with Sheila Baer at FDIC

Nearly three weeks ago, Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, told Congress that the agency was working closely with Mr. Paulson’s department to develop a robust anti-foreclosure plan. Since then, the Treasury Department has balked and equivocated while the White House has argued that it is already doing plenty to help homeowners.

After a year of doing far too little to stem a flood of foreclosures, the problem is getting worse. Defaults lead to foreclosures that push down all house prices. Those falling prices — combined with rising unemployment, falling incomes and another expected surge in monthly payments on adjustable rate loans — will surely lead to more defaults and deeper price declines, threatening bank solvency and prolonging the credit crunch.

Clearly, the system won’t stabilize until house prices stabilize, and banks won’t lend freely until losses on defaulting mortgages abate.

The crisis may never have spun so far out of control if the government had initiated a rigorous effort last year to prevent mass defaults. Instead it kowtowed to the mortgage industry, backing voluntary, loan-by-loan renegotiations that have failed to solve the problem.

If the administration’s $700 billion bailout has any hope of working, it will have to address the foreclosure problem — now, not later.

The F.D.I.C. has developed a sensible plan that is being used, with promising early results, to rework defaulting mortgages at IndyMac, the failed Southern California bank. Under the plan, the banks restructure troubled mortgages — lowering the interest rate, extending the loan term or deferring payment on a portion of principal — so that they’re affordable. The goal is to reduce the monthly payment to about a third to two-fifths of a borrower’s after-tax income.

The deal also benefits mortgage lenders and investors, because, over time, the new loans would make more money than would be recouped in a foreclosure. If the loans default, the government would share in the losses.

It wouldn’t take much — when compared with $700 billion — to expand this plan nationwide: about $40 billion. It could be done without new legislation since the money could come from the bank bailout fund.

Critics warn that the plan would encourage homeowners to deliberately default on their current mortgages in hopes of getting a better deal. That assumes that homeowners in good standing would knowingly ruin their credit in order to catch a break. The plan also only applies to people whose mortgages are unaffordable based on their income. Might some freeloaders sneak in? Yes. Is that a reason not to move forward? No.

Within the administration, there has been talk about a possible new foreclosure plan that might temporarily reduce monthly payments, say, for five years, or would require the government to make direct payments to the lender to make up for lost cash flow. That would be a misuse of taxpayer dollars because temporary loan modifications would not stabilize the system in the long run.

All roads, into and out of this crisis, run through the housing market. Mr. Paulson should be pressing for a streamlined plan that includes permanent modifications to troubled loans. That is the only way to keep Americans in their homes, save the banks and the economy.

One Response

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