The emerging mortgage bailout plan

Yesterday, the NY Times ran an article titled, "Mortgage Plan May Aid Many and Irk Others". The story described the federal proposal to assist homeowners who are at risk of foreclosure. It's great that the Feds are finally turning to the problem underpinning the crisis; however, it's unfortunate that the Bush administration continues its focus on keeping lenders whole as opposed to helping borrowers. To that end, their plan tries to assess whether it benefits the lender to let a home foreclose versus negotiate easier terms with the borrower. And, of course, if the bank chooses to work out the loan, then the federal government will guarantee it. Unfortunately, this approach, which is far more bank-friendly than consumer-friendly, raises a number of questions:

• Will banks work in good faith with consumers? To date, they haven’t. As Joe Nocera observed in a recent article, even after the Fed invested billions in them, banks have shown greater interest in new mergers than using the funds for their intended purpose - making loans
  
  
• The loan servicers tend to operate on auto-pilot when it comes to the foreclosure process. Can we trust the loan servicers to really help borrowers? Here's a clue - most of the loan servicing in the country is conducted by three banks: Chase, Bank of American and Wells Fargo. These are, of course, the three largest institutions who have capitalized on the financial crisis to grow even larger.
  
  
• Millions of loans are in jeopardy now. The federal proposal entails considering each loan separately which promises to be an enormously time-consuming process. Will this approach address the crisis quickly enough to make a difference to at risk homeowners?
  
  
• To qualify for the program, it appears that borrowers have to miss several monthly payments. As your article notes, this will incentivize many borrowers to stop making monthly payments. Others will feel they are being punished for their continuing to make payments.
  
  
• Last, the proposal ignores borrowers who were illegally or unethically prompted to refinance their homes and will continue to face foreclosure. Consider the elderly individuals who owned their homes outright but were "persuaded" to take on a subprime loan.
  

If this or the future administration can leave ideology behind (isn't it past time to do so?), there are other simpler, broad-stroke approaches to resolving this crisis. Several have been discussed in the Times, such as the proposal to refinance all residential mortgages on primary residences into 30-year fixed-rate mortgages at 5.25 percent and place those mortgages with Fannie Mae and Freddie Mac. At a minimum, the government could institute a foreclosure moratorium and then lock in payments at a lower rate and then permit them to rise (or fall) very slowly over several years. This would stabilize housing prices and permit a softer landing. The real story behind this economic crisis has been the costly triumph of ideology over common sense. The ideologues have been proven wrong and it's time to do what works. To that end, we have to stop feeding the Frankenstein institutions that created this mess and focus on the human beings who are at risk of losing their homes. Failure to prevent them from going into foreclosure will certainly lead to a cascade of declining home values, great human suffering and a longer, deeper recession for all of us.