Mortgage Mess: Is Relief in Sight?

My own view is more sympathetic, for two reasons. The first, frankly, is self-interest. As a homeowner I'm concerned about the value of my own home. Studies show that anytime a house is foreclosed, the value of nearby properties tends to drop. Last month I spotted a "public auction" sign in front of a house two blocks from mine. I hope it's not the first of many. My own mortgage is a conservative, fixed-rate loan, so I won't directly benefit from the subprime bailout—but if it keeps some of my neighbors from losing their homes, I'll benefit because it will help my house retain more of its value. (I will, of course, also be happy to avoid watching neighbors traumatized by foreclosure, but in this column I'm weighing the pros and cons economically, not emotionally.)

The other reason for my sympathy is that I'm aware of how hideously complicated mortgages have become over the last two decades. I have absurdly well-educated friends who don't really understand how mortgages work. Even though I write about this stuff for a living, at times I've agonized over whether to pay points or whether my mortgage broker's fees are legit.

In the coming weeks many of us will tune into "It's a Wonderful Life," that heartwarming tale of George Bailey and his family's efforts to bring homeownership to their town's working class. In a way, our 21st-century world of teaser rates, option ARMs, balloon payments and "0% Down!!" advertisements—all factors that led to the current crisis—are simply extensions of the pre–World War II financial innovations, like the Baileys' savings and loan, that helped the less affluent buy homes in the first place.

But financial innovation comes at a cost. Just as the move from defined-benefit pension plans to 401(k)s has shifted the onus onto individuals to save for their own retirements, the explosion of mortgage products has required borrowers to be a lot more savvy about the fine print of their home loans. Even some smart people overestimate the average borrower's sophistication in these matters—as evidenced by Alan Greenspan's 2004 speech in which he argued that more Americans would benefit from taking out adjustable-rate mortgages. It's a thesis that makes theoretical sense, but seems to assume the average homebuyer understands interest-rate risk as well as someone trading LIBOR (London Interbank Offered Rate) futures at Goldman Sachs.

So while the Bush administration deserves praise for persuading lenders to ease the strain for troubled borrowers, today's news is likely to be just the first step in easing the hangover from our real estate orgy. Today's deal won't help Hyacinth O'Meally nor many of the other troubled borrowers who have been e-mailing me in recent weeks. Unless Americans want a lot more "public auction" signs sprouting from lawns near them, we're likely to see some more accommodations down the road.

Daniel McGinn is a national correspondent for NEWSWEEK and the author of "House Lust: America's Obsession With Our Homes," to be published by Doubleday in January. To learn more about the book, click here .

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