Mortgage relief proposals gain momentum

The goal of all these proposals is to break a logjam that has resulted from the "securitization" of millions of home loans that have been bundled and sold off to many different investors, making it difficult to renegotiate when they go sour.

“If the government were to temporally acquire these loans, they’re now the investor," said Taylor. "They turn to the servicers and say, ‘Restructure and modify this loan, but use standard underwriting criteria and make sure it matches the borrower’s ability to pay.’”

So far, proposals to replace unsustainable mortgages with loans that homeowners can afford have been thwarted by the political backlash to putting taxpayer dollars at risk in a government “bailout” of borrowers. Following the Fed’s recent $30 billion loan guarantee to save Bear Stearns from collapse, proponents of these plans to say it’s only fair that both sides of these flawed mortgages should be helped.

The proposals seek to overcome that opposition in three ways. In general, investment properties and second homes would not qualify for new loans. Mortgage lenders and investors who bought into mortgage pools now facing defaults would have to take losses.

Borrowers also would be required to turn over some of the future appreciation in the value of their homes to pay back the government. The Help Now proposal, for example, would give the government a small lien on the home, payable when the home is sold or refinanced. By selling those liens into the secondary market, the government could divest its stake long before the home was actually sold or refinanced.

Opponents of wider government relief efforts also argue that many homeowners who are current on their loans deserve a break. To help overcome that issue, Blinder is proposing that homeowners who seek relief should be barred from taking out second mortgages or home equity lines and, perhaps, would have to agree to limits on credit card debt.

“The idea is to address the perfectly legitimate fairness complaint,” Blinder said. “And secondly to reduce the incentive for everyone to run to the government by putting some somewhat onerous terms on them — onerous enough that if you’re not really in trouble you’re not going to be attracted by this.”

Some basic issues still need to be resolved in reconciling the proposals. One is the question of whether loans would be bought by a federal agency and, if so, which one. Under Dodd’s bill, the government wouldn’t take ownership of the loans; bad paper would be marked down and paid off with new, more affordable loans. An FHA guarantee would sweeten the deal for new investors, and homeowners would pay the premiums for that insurance.

It’s also not clear whether the solution requires the creation of a new entity, similar to the Resolution Trust Corp. set up in 1989 to clean up the savings and loan industry at a cost of hundreds of billions of dollars. Some opponents balk at the idea of creating yet another federal bureaucracy.

Others say it would take too long: By the time a new agency is created, funded and staffed, it would be too late for many homeowners and would do nothing to stop the downward spiral in home prices as those foreclosed homes are dumped onto an already-glutted market.  

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