Foreclosure folly

If all goes according to plan, the Obama administration’s new anti-foreclosure effort will prevent many more foreclosures than its current one and do more to moderate the decline in home prices. That is a big if.

One of the big drawbacks to the administration’s original plan, launched a year ago, is that it focuses on reducing a troubled borrower’s monthly payment by lowering the interest rate. That ignores the fact that unemployed borrowers often cannot afford even reduced payments.

Another problem with the original plan is that participation has been largely voluntary; lenders were offered incentives to join but were not compelled. The improved plan attempts to address the problems of borrowers who are unemployed or underwater. And for jobless homeowners, lenders that participate in the plan will be required to help in some cases.

If lenders do participate, the new plan could prevent nearly 1.5 million foreclosures from now through 2012, compared with an estimated 650,000 under the old plan, according to Moody’s Economy.com. Many foreclosures will also be delayed, though not ultimately prevented, as lenders assess whether borrowers qualify for help under the new plan. Taken together, preventing and postponing foreclosures would help stabilize house prices in the near term and thus reduce the threat that foreclosures pose to the nascent economic recovery.

But foreclosures would still be a problem. Even if the new plan saves 1.5 million homes, an estimated 3.6 million homes will be lost between now and 2012. That portends a weak housing market for a long time, which, in turn, portends a long, slow recovery.

For now, lenders call the shots. If the new plan doesn’t work, the administration must find a way to compel them to rework troubled loans. The risks from the spree of bad lending and bad borrowing — foreclosures, falling house prices, economic hardship — are still there.

— The New York Times