A rescue plan on hold

Our view: Ending the downward housing spiral is vital to reviving the economy

November 14, 2008

In Maryland and across the nation, a flood of foreclosures is continuing to push house prices lower while adjustable-rate loans are moving monthly mortgage payments higher. That's a combination that leads to more defaults and still lower home prices. It's hard to imagine how the economy can recover until that downward spiral ends and home prices stabilize.

Despite that challenge, Treasury Secretary Henry M. Paulson Jr. this week took another wrong turn in his management of the government's $700 billion rescue package. He said he would shift his priority from buying toxic mortgage-based securities and begin providing funds to credit card, auto and student loan companies to encourage consumer spending and help spark a recovery. The billions he has already invested in banks thus far has done little to make bank loans more available, and it is not clear that these new investments will produce a better result.

Meanwhile, Mr. Paulson continues to pay only lip service to efforts to help millions of struggling homeowners facing foreclosure who are at the heart of the current recession. That should command his attention. Mr. Paulson has said that he and his aides "are examining strategies to mitigate" foreclosures. It's time to stop studying and take action - a successful strategy is already in place.

Several weeks ago, Sheila Blair, chairwoman of the Federal Deposit Insurance Corp., said her agency was working closely with the Treasury Department on an anti-foreclosure plan .

The FDIC plan, devised when the agency took over IndyMac, a former top 10 mortgage lender, answers concerns of critics who question the social justice of rescuing some homeowners while others sacrifice to pay their mortgages. It would reduce mortgage payments to less than 40 percent of a borrower's after-tax income and extend the term to provide mortgage holders with a fair return on their investment. The government guarantees the deal to protect the lender against loss.

White House officials reportedly still fret over bailing out homeowners whom they believe should pay for their mistakes. But only those with mortgage trouble who are living in their primary residence would be eligible - and that should eliminate the speculators who relied on risky loans to cash in on the housing bubble. The housing crisis continues to exact a toll on stable neighborhoods and the economic security of every citizen.

Bush administration officials have clearly recognized that truth on Wall Street, where, for the common good, they have invested hundreds of billions to prop up financial institutions even as serious management missteps were apparent. Now they should act to provide more modest help for Main Street homeowners with that larger goal in mind.

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