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How Not to Prevent Foreclosures
The New York Times | Editorial
Thursday 27 March 2008
With foreclosures surging, the last thing the nation needs is another government-hosted
meeting where mortgage lenders pledge once again to do their utmost to help
distressed borrowers stay in their homes - and then go back to the business
of foreclosure.
Yet, a meeting and a round of pledges is exactly what Senator John McCain called
for on Tuesday, as if the country had not been down that fruitless road already.
The real core of his speech was his argument against government action to help
dig distressed homeowners - or the country - out of the mortgage
mess.
Mr. McCain's talk therapy will not ease, let alone end, the worst foreclosure
crisis since the Depression or the financial crisis that has erupted in its
wake. But worse yet is what it says about the presumptive Republican nominee's
view of the economy and the government's responsibility to protect and
help its citizens.
His suggestion that federal aid might wrongly reward "undeserving"
homeowners sounded both mean-spirited and economically naïve. And then
there is the double standard. He seemed less concerned about the government
helping reckless bankers, endorsing its role in preventing the bankruptcy of
Bear Stearns.
No one has ever proposed helping real estate speculators. And the senator's
language obscures the reality that most troubled homeowners did not get into
trouble by themselves. Lenders, aided and abetted by bankers and do-nothing
regulators, lured many borrowers into overly complex, ultimately unaffordable
loans. Mr. McCain also failed to grasp that the foreclosure problem has gone
far beyond the issue of the deserving and undeserving. What is on the line now
is the health of the economy, including the viability of the financial system:
Helping troubled borrowers stay in their homes would help the banks by reducing
defaults and foreclosures.
The question now is not whether the government should intervene, but how. The
two Democratic candidates clearly understand that better than the White House
or Senator McCain. Senators Hillary Rodham Clinton and Barack Obama have called
for a bigger role for the Federal Housing Administration that would allow it
to restructure or refinance more troubled loans.
Mr. Obama has endorsed the best idea currently on the table to prevent foreclosure:
amending the law so that troubled borrowers can have their mortgages modified
in bankruptcy court. That would give lenders a big incentive to work with borrowers
- reducing interest or lowering principal balances - before they
opted for bankruptcy protection. Mrs. Clinton has not endorsed bankruptcy reform.
She has called for $30 billion in federal funds to bolster state and local foreclosure-prevention
efforts and has proposed a 90-day moratorium on foreclosures and a rate freeze
on subprime adjustable mortgages. Those measures also could help, but as the
crisis has developed, the problem has become less one of resetting interest
rates and more one of borrowers owing more than their homes are worth. Bankruptcy
reform is a better way to deal with that problem.
The country, of course, cannot wait for the next president to be inaugurated
to seriously address the foreclosure problem - although we fear that Mr.
Bush still doesn't see the urgency or the full dangers of inaction. The
candidates' prescriptions for the mortgage mess are an important guide
to what sort of leader he or she would be. After eight years of Mr. Bush's
serial failures, what the country needs is a president who is willing to recognize
when the government's help is essential - and who is ready to use
government power.
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