House rules

It’s hard to believe, but the problems set off by the collapse of the housing bubble keep getting worse. Housing prices have dropped so far that one in 10 homeowners owe more than their house is worth. And as prices fall and more borrowers are jolted by interest rate “resets,” the drag on the overall economy will only increase.

There’s widespread agreement that lenders should strike new deals with troubled but capable borrowers to keep them out of foreclosure, yet such efforts haven’t stopped the foreclosure numbers from rising. That’s why momentum is growing in Congress to intervene on behalf of borrowers who could afford to keep their homes if their interest rates and loan balances were lowered to more realistic levels.

A pair of proposals (HR 3609 and S 2136) would allow bankruptcy judges to rewrite mortgages for troubled debtors with sub-prime or nontraditional loans. In essence, the bills would let judges treat home mortgages the same way they do other debt backed by collateral. That means they could set new interest rates and write off any excess debt.

The proposals have lenders in an uproar because they would be forced to accept some of the risk of homes losing value, as they do when they lend money for commercial buildings or rental housing. If they’re not shielded from that risk, they say, they’ll charge higher interest rates, require larger down payments and turn down riskier borrowers. Those threats, however, aren’t credible. The lending binge that led to the sub-prime fiasco has already prompted regulators to demand a return to more cautious mortgage practices, including better evaluation of borrowers and higher down payments. Such steps would guard lenders against much of the risk posed by borrowers going bankrupt.

Still, lawmakers and regulators should explore other ways to head off foreclosures that keep borrowers out of bankruptcy court. These include measures that give lenders and loan servicing companies more incentive to lower interest rates and balances due -- for example, by enabling them to write off part of the loan now, then recoup it if the house is sold later at a profit. With interest rates edging down and the number of voluntary loan modifications rising, Congress can afford to give the industry’s self-help efforts more time. But with foreclosures mounting fast, that time is short.