The Obama administration has announced a major new effort to stem the foreclosure crisis by focusing on two groups: the unemployed and the rapidly growing share of homeowners who owe more on their mortgages than their houses are worth. Getting banks to temporarily reduce payments for the unemployed fits in with many previous efforts to help those who find they are unable, because of the economic downturn, to meet their mortgage obligations. But the second part of the plan, helping those with so-called "underwater" mortgages reduce the amount of principal they owe, may be more difficult for many Americans to swallow.
The plan calls for the government to use $14 billion in Troubled Asset Relief Program money to provide incentives for banks to reduce the amount of principal homeowners owe and for the Federal Housing Administration to help underwater borrowers refinance into loans they can afford. That may be galling to many who see it as a bailout of people who made bad decisions. But this is an occasion when we have to swallow our sense of economic justice out of self interest. Nearly a quarter of Maryland residents owe more on their mortgages than their homes are worth, the seventh-highest rate in the nation. That means more homes are at risk of foreclosure, and more people are going to simply start walking away from their mortgages, risking a further cratering of the real estate market.
The key will be making sure we also enact sufficient regulatory reforms to make sure the excesses of the real estate boom aren't repeated. But the White House has said legislation to reform Fannie Mae and Freddie Mac, the giant publicly backed companies that helped fuel the subprime mortgage boom, could be more than a year off. We can't afford to wait that long.