Default position

The bush administration unveiled another initiative Tuesday to help struggling homeowners, calling for a 30-day moratorium on foreclosures for borrowers who have fallen at least three months behind on their payments. The goal of Project Lifeline is to give borrowers who haven’t worked out new terms with their lenders more time to do so. Like the administration’s previous efforts, this one is voluntary, yet it quickly attracted the support of six major loan servicing companies that represent about half of the mortgage market.

The new effort reaches homeowners who weren’t helped by the administration’s much-ballyhooed Hope Now plan, which proposed to delay interest rate increases for borrowers who hadn’t yet gone into default. Both initiatives aim to boost a mortgage lending industry that has found it tough to protect its interests in the wake of the sub-prime lending fiasco -- and unfortunately, both are too weak to motivate lenders that aren’t ready or willing to make sweeping changes.

Despite its good intentions, Project Lifeline seems unnecessary and ineffectual. First, the government shouldn’t need to tell lenders to slow down their foreclosures. With housing prices falling fast, those that foreclose are stuck with an asset that’s hard to sell, declining in value and potentially worth less than what it cost. Second, the initiative assumes that borrowers who have been avoiding their lenders’ calls and letters will nevertheless read a mailing from the servicing company, pick up the phone and try to negotiate new terms. Third, the intervention comes so late in the process that the chances of salvaging the loan are poor.

With millions of risky adjustable-rate loans due to jump to higher interest rates in the next two years, the best thing lenders and their servicing companies can do is to determine in advance which borrowers are threatened and help them obtain better terms -- either directly or through credit counselors. Although lenders have dramatically increased the number of loans modified, these moves aren’t keeping pace with foreclosures initiated. What’s worse, the help is reaching only a fraction of the delinquent borrowers. Rather than relying on lenders to save themselves and their customers, the government should be doing more to inform borrowers about their options, while also giving lenders more incentive to modify loans. A good start would be to require more disclosure from lenders and loan servicers about their efforts to avoid foreclosures so shareholders can see whether the companies they own are doing enough to get themselves out of this mess.