The negotiations between mortgage servicers and state and federal officials are a distracting sideshow to the serious debate we should be having about how to solve the nation's chronic housing problems.

The sad fact is millions of people have mortgages they can't afford, no matter how much their monthly payment is reduced. It may sound harsh but the national interest is not served by policymakers coming up with yet another bad idea for how to keep those people in their homes.

"Everyone keeps coming up with these magic bullets, some scheme that is going to prevent 1 million foreclosures at little or no cost to anyone," says Paul Willen, a senior economist and policy adviser in the Federal Reserve Bank of Boston's research department. "But there is no cheap, easy way to fix this."

Policymakers don't want to admit that. Most government officials have adopted a wait-and-hope approach, and those who do talk about housing make earnest statements about keeping hardworking people in their homes. That's a worthy goal, for sure, but it's ignoring reality. From 2007 to 2010 there were 8.6 million foreclosures. Another 2 million foreclosures are in the works now, according to William R. Emmons, an assistant vice president and economist at the Federal Reserve Bank of St. Louis, and another 4 million mortgages are so underwater that they are headed toward foreclosure.

But rather than own up to that, the federal government is, once again, standing by while the states step in.

Innovation at the state level would be nice, and that's exactly what the billions pledged to the Hardest Hit funds more than a year ago were supposed to accomplish. But the state AG settlement has hijacked center stage, commanding more than its fair share of everyone's attention.

The AGs started out with an admirable goal: establish mortgage servicing standards so we never have another mess like this. But then they pivoted to the more controversial idea of reducing borrower's principal. Rather than being a silver-bullet solution, principal reductions have derailed the settlement. Lenders balked because they consider principal reductions an invitation to anyone who has ever considered walking on their mortgage to grab their running shoes. It doesn't matter which side is right.

Say the servicers agreed to cough up the $20 billion that's been suggested, and say that leads to $20,000 being written off the mortgages held by 1 million people. That would hardly make a dent in the problem.

A hodepodge of loan modificantion programs have't worked either. The government's wait-and-hope strategy hinges on an upswing in home prices, which is not happening.

The Obama administration is going to have to bite some political bullets. Borrowers who don't deserve help are going to get it. Speculators will cash in. Lenders with lousy underwriting may avoid some losses. Servicers with lax controls may be left off some hooks. Taxpayers will get stuck with some of the bill.

It won't be politically popular, but the alternative is another decade or more of a real estate market strangled by foreclosures.


Babara A. Rehm


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