How about some leadership from the Fed?

October 8, 2007

New York Times editorial page today (bold type added):

The foreclosure crisis is rooted in reckless — and shamefully underregulated — mortgage lending. Many homeowners — mainly subprime borrowers with low incomes and poor credit — are now stuck in adjustable-rate loans that have become unaffordable as monthly payments have spiked upward. Their predicament is not entirely of their own making, and even if it were they would need to be bailed out because mass foreclosures would wreak unacceptable damage on the economic and social life of the nation.

The relief efforts so far have been too little, too late. In August, the White House established a program to allow an additional 80,000 borrowers to refinance their loans through the Federal Housing Administration — on top of 160,000 who were already eligible. That’s not enough. Foreclosure filings soared to nearly 244,000 in August alone.

Federal regulators and Treasury officials are urging mortgage lenders and mortgage servicers to do their utmost to modify loan terms for at-risk borrowers, but saying “please” hasn’t worked. To be effective, modifications must reduce a loan’s interest rate or balance or extend its term, or some combination of the three. Gretchen Morgenson reported recently in The Times that a survey of 16 top subprime servicers by Moody’s Investors Service found that in the first half of the year, modifications were made to an average of only 1 percent of loans on which monthly payments had increased.

What’s missing is executive leadership to bring together many players, including lenders, servicers, bankers and various investors. All of them are affected differently depending on whether and how a borrower is rescued, which makes it difficult to agree on a rescue plan. But all of them also made megaprofits during the mortgage bubble. Under firm leadership, they could come up with a way to modify many loans that are now at risk.

In a recent PD op-ed, CSU law professor Kathleen Engel wrote that the Federal Reserve Bank of Cleveland should take on that leadership job, in partnership with County Treasurer Rokakis and Cleveland Mayor Jackson.

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