Is Anyone Going to Save Us?

We're in a box. The rising pace of foreclosures lies at the heart of this recession. But Washington hasn't yet hatched a rescue plan that seems likely to save many homes. The reason it's not making a dent is a simple one: conditions aren't bad enough. Most lenders are better off sitting tight than making deals on their loans.

You may think conditions are bad. Average home prices have slumped nearly 15 percent since their high in July 2006, and more than 20 percent in some unlucky cities. Foreclosure filings jumped 57 percent in the year that ended in March, RealtyTrac reports. In California, they're currently running at the rate of 2,000 a day.

A surprising number of mortgage investors, however, are doing OK. When subprime mortgages were bundled and sold, portions of the pools carried lower risk. That's where about 70 percent of the investments went. Enough borrowers are still making payments on their loans to keep those portions profitable, says Guy Cecala, publisher of Inside Mortgage Finance. As a result, the investors have little incentive to restructure loans in default. If a mortgage goes bad, it's in their interest to foreclose fast, to get the maximum amount of money out.

Lenders have adjusted a few thousand mortgages to more affordable levels, in direct negotiations with individual borrowers. Rescues have been rising, but foreclosures are rising faster still.

The government has taken some steps to ease the general financing crunch. Fannie Mae and Freddie Mac, which purchase mortgages from lenders, are being allowed to accept larger loans, with a top of $729,750 in the contiguous 48 states. That can help prime borrowers refinance jumbo loans at lower rates than they paid before. Lenders have been slow to act, however, for two reasons. The rates are still higher than on traditional loans, and the program lasts only until the end of the year (an extension is likely).

The Federal Housing Administration, which insures mortgages, can also take on larger loans than it was allowed before. It can even accept borrowers who have missed a couple of payments. For low-down-payment loans, the FHA has become the only game in town (you need as little as 3 percent of the purchase price). This program, too, is moving at turtle pace while lenders learn the rules.