Foreclosures Finally Getting A Look

Post-stimulus, we still have an insolvent banking industry and a housing market in free fall. Prices continue to drop at an alarming rate, and there doesn't seem to be a bottom. And 2008 was a record year for foreclosures, which depress prices, lower property values and suck money out of the system.

Clearly we need a solution. And this is what the White House is looking at doing.

The Obama administration is considering a proposal to help distressed homeowners by subsidizing lenders who cut the interest rate on mortgages, according to sources familiar with the discussions.

The sources cautioned that the administration is still weighing several options for addressing the country's growing foreclosure problem. The Treasury Department has set aside $50 billion for a homeowner relief program, which officials said was likely to be announced within the next week. The sources spoke on condition of anonymity because the plans are not final.

The initiative would include both carrots and sticks for lenders, said lawmakers briefed by the administration. For example, it would probably endorse legislation to allow bankruptcy judges to change the terms of mortgage loans, a measure opposed by the industry. But the program would also include legal protections for lenders that modify loans but fear being sued by investors. Government subsidies could be among the inducements for lenders, the lawmakers said.

Under one proposal being actively discussed, the government would share the cost to lenders of reducing interest rates for cash-strapped borrowers, the sources said. For example, consider a homeowner with a $200,000 mortgage and a 9 percent interest rate who now pays about $1,700 a month, including taxes and insurance. Lowering the interest rate to 5 percent would reduce the payments to about $1,160. The government and industry would each chip in to cover the difference, about $540.

If this is just talking about existing homeowners and not slashing rates for new homes below what the market will bear, which will reinflate the housing bubble for no reason, I think there's some merit to it. It looks like the lenders are ready to get into this as well. But it should be combined with other measures.

First of all, there should be an absolute moratorium on foreclosures for 60-90 days. Fannie and Freddie are suspending sales, which is good, and some big banks are temporarily halting them as well. This time is needed for implementation of this loan modification idea, which is essentially the brainchild of Sheila Bair at the FDIC. There's going to be some moral hazard in bailing out people who made bad decisions in getting a home, but it's a pittance compared to all the corporate welfare money promised, and considering that predatory lending put homeowners into mortgage products they didn't even want, I think we can live with a little excess at the margins. Reuters has more.