Today, the Wall Street Journal reported that mortgage giants Fannie Mae and Freddie Mac “said they would help streamline the modification of loans for potentially hundreds of thousands of homeowners who are 90 days or more behind on their mortgage payments.” This is a move by the Bush administration that is meant “to help troubled homeowners“:
To qualify, borrowers would have to be at least three months behind on their home loans and would have to owe 90 percent or more than the home is worth…Qualified borrowers would get help in several ways: The interest rate would be reduced so that they would not pay more than 38 percent of their gross income on housing expenses. Another option is for loans to be extended to 40 years from 30, and for some of the principal to be deferred, interest-free.
The plan focuses only on loans that Fannie and Freddie own or guarantee. While Fannie and Freddie are “the dominant players in the U.S. mortgage market,” they hold “only 20 percent of delinquent loans.” Sheila Bair, chairman of the Federal Deposit Insurance Corp., said the plan “falls short of what is needed to achieve wide-scale modifications of distressed mortgages.”
Despite the criticism from Bair and others, like Sen. Charles Schumer (D-NY), this plan is a step in the right direction for an administration that has been woefully hesitant to take any action that would aid homeowners. However, Bair and Schumer are absolutely right to say that the plan does nowhere near enough. Far more must be done to include lenders outside of Fannie and Freddie in a widespread mortgage restructuring plan.
As part of a new book entitled Change for America: A Progressive Blueprint for the 44th President, Center for American Progress Senior Fellow Michael Barr lays out how the federal government can “create a process for the rapid and transparent repricing and restructuring of existing home mortgages themselves”:
The Federal Reserve would run auctions, in which Treasury and the private sector would purchase mortgages from current lenders and investors at discounts determined by the auction process. These mortgage holders would take a hit, trading a reduction in asset value and yield in exchange for liquidity and certainty.
The Bush administration has been quick to bail out troubled financial institutions (in the case of AIG, repeatedly). Action aimed at helping troubled homeowners was long overdue, and can not end with Fannie and Freddie.