Mortgage tightrope

With Congress back from recess, Washington is resuming discussion of the sub-prime mortgage mess and how government might help the millions of American homeowners facing foreclosure.

So far, policymakers have advocated restraint. In a speech last week, President Bush called on lenders to help qualified borrowers restructure their mortgages. He also suggested letting the Federal Housing Administration insure refinanced loans for borrowers with good credit and waiving taxes on forgiven debt when loans are restructured. The Federal Reserve Bank and other banking agencies have advocated guidelines to combat predatory lending and this week backed the president’s call to lenders.

The most aggressive rhetoric has come from congressional Democrats, who support all of the above and more. Many would like to raise investment limits at scandal-ridden Fannie Mae and Freddie Mac, which would encourage newly cautious investors to back more mortgages, freeing up credit. Rep. Barney Frank (D-Mass.), who chairs the House Financial Services Committee, is expected to introduce a bill aimed at preventing predatory lending. Sen. Charles E. Schumer (D-N.Y.) of the Senate Banking Committee wants to allocate $100 million to community-based housing nonprofits that can help qualified borrowers work with lenders to refinance, and he also wants to assign fiduciary responsibility to mortgage brokers and lenders.

In weighing the policy options, Washington must perform a delicate balancing act. Politicians want to help constituents in need. At the same time, no one wants a “bailout” that would reward the financial irresponsibility of borrowers who couldn’t afford the homes they bought, of mortgage brokers and lenders who peddled onerous loans and of Wall Street investors who bankrolled the whole operation.

But where to draw the line between useful assistance and a bailout? It’s easy to see how raising investment limits for Fannie and Freddie might constitute a boondoggle for Wall Street, or why using tax dollars to pay off bad loans is something virtually no one advocates. But does Bush’s FHA proposal, which would help just 80,000 homeowners, constitute a bailout? Does funding mortgage counseling, which, far from keeping undeserving borrowers in overpriced homes, often advises them to sell, allowing local real estate prices to readjust in a rational way? Although it’s not the government’s job to prop up markets, letting neighborhoods and the economy spiral into foreclosure chaos isn’t thoughtful public policy either.