Borrowing time
It has come to this: President Bush ,1,2175500,full.story and his would-be Republican successor, Arizona Sen. John McCain, ,1,2568822.story both called last week for the government to guarantee loans for troubled sub-prime borrowers. Neither one went as far as the Democratic presidential hopefuls or key Democratic lawmakers, yet there is now a bipartisan chorus in favor of helping lenders write down loans and cut borrowers’ interest rates.
The gradual shift among Republicans exposes one of the more troubling aspects of the sub-prime mortgage meltdown. With housing prices in steep decline, many borrowers who’d been enticed to buy homes with little or no money down are now tempted to abandon them. It’s hard to say exactly how many homeowners are in that position, but it’s not a trivial number. According to Moody’s Economy.com, the drop in property values has left nearly 9 million homeowners owing at least as much on their mortgages as their homes are worth. The decline makes it hard for borrowers with adjustable-rate loans to refinance before their mortgages reset, driving up their monthly payments. If they stumble into default, Paul McCulley of Pacific Investment Management Co. recently observed, most states’ bankruptcy laws give them a simple way to escape responsibility for their debt: move out and mail in the keys. Lenders can sell the home, but they’ll still be stuck with a significant loss.
Many of those who aren’t at risk of defaulting say the government should let the losses mount. Lenders, after all, created this problem by marketing increasingly risky loans without showing much interest in borrowers’ ability to repay. There’s a rough justice to the trap lenders set for themselves and the investors to whom they sold bundles of mortgages: By allowing borrowers to put little or none of their own money into the houses they were buying, lenders effectively invited their customers to renege in the event the market went bad.
Unfortunately, the deep slump in the housing market is dragging down the whole economy. With foreclosure rates climbing, the broader downturn will only get worse unless lenders keep more borrowers in their homes -- typically, by writing off so much debt that the mortgages shrink to less than the properties’ value, creating some equity for borrowers. That’s why pressure is mounting on the government to prod lenders to aid homeowners who took on more debt than they could handle, even if it means exposing taxpayers to some risk. Homeowners who’ve dutifully paid their bills would love an equity handout too, but they’re not the ones who need to be persuaded. Most of them have too much invested in their houses to walk away, even without the government’s help.
