For all the government’s actions to prop up the markets, credit tightened again last week and stocks sold off worldwide. Rather than confidence, fear of global recession has taken hold – and for good reason.
Bush administration officials have failed to deal effectively with the root cause of the financial crisis – unaffordable mortgages peddled during the housing bubble and the mass foreclosures that have followed. The only ray of hope is that worsening conditions may finally force them to act. At a hearing on Thursday in the Senate Banking Committee, Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, confirmed that the F.D.I.C. is working with the Treasury to streamline the reworking of troubled mortgages. The aim is to make the loans affordable over the long term so that borrowers can avoid foreclosure and keep their homes.
Though details of the plan are not yet worked out, the outline calls for creating standardized criteria that would be used by mortgage servicers, the firms that handle collection and foreclosure proceedings for lenders and mortgage investors. Loans modified under the criteria would be eligible for a federal guarantee that would protect lenders and investors against default.
If the criteria are well established, defaults on the modified loans should not be a big problem. When the F.D.I.C. took over IndyMac Bank in California last summer, Ms. Bair established a streamlined program for 60,000 troubled loans from the failed bank. The program, which is yielding encouraging initial results, calls for modifications that lower a loan’s interest rate, extend the life of the loan or defer payment on a portion of the principal. Taken together, the modifications lower the monthly payment to no more than 38 percent of the borrower’s pretax income.
An IndyMac-like plan, on the federal level, would be significantly better than anything else tried so far. To date, servicers have been reluctant to amend loans, saying they could be sued by loan investors who might be disadvantaged by the modification. A government guarantee on the modified loan should reduce the risk of lawsuits. The new plan could also be up and running quickly, because the authority to offer the government guarantee was included in the bank bailout legislation passed this month.
An IndyMac approach, with its emphasis on permanent changes to a loan’s terms, is also superior to ad hoc anti-foreclosure efforts of the past year that have focused on offering catch-up repayment plans. The administration has often cheered the proliferation of repayment plans as evidence of the mortgage industry’s willingness to work with troubled borrowers. But such plans often only delay foreclosure, because they do nothing to make the loan affordable over time.
No single approach will solve the foreclosure problem. But Ms. Bair and the F.D.I.C. – an independent agency – deserve enormous credit for bringing a workable plan this far along in an administration resistant to such efforts to address the problems of homeowners.
Congress should give the plan its full backing, and pursue other anti-foreclosure efforts. In a hopeful development at the hearing on Thursday, the Banking Committee chairman, Senator Christopher Dodd, the Connecticut Democrat, said he was considering a new round of anti-foreclosure legislation in November. That would include allowing bankruptcy judges to modify troubled loans under court protection – a much needed and long overdue change in policy.
In the meantime, the Treasury would do well by the American public by going where Ms. Bair and the F.D.I.C. are leading.