First Person: Daniel McGinn on the Mortgage Crisis

When you walk through a FOR SALE house with a real-estate agent, you expect to hear gushing about the "solid bones" or the "great potential." But as I toured listings this year while covering the deepening housing crisis, I heard a different line of patter. "Hold your breath," advised one agent, taking me into a basement with a mold-infested indoor pool that left my sinuses burning. Graffiti on bedroom walls, missing appliances, boarded windows, even crime-scene tape—they're becoming the norm as foreclosed houses swamp the market. By some estimates, there are now more than 1 million foreclosed homes for sale, and with prices still falling, more homeowners are going "underwater"— owing more on their mortgage than their home is worth—every month.

Touring a foreclosed home is like watching an episode of "Extreme Makeover: Home Edition" in reverse. You can imagine the heartwarming scenes of family life that once played out inside, but now you're left with only a dwelling that's been trashed by an angry foreclosure victim. Prospective owners usually need to do a major face-lift, which makes them want a dramatic price reduction before they buy. "If you got into real estate because you wanted to help people buy their dream home, [selling foreclosures] does not give you that fulfillment," says one agent who goes through a lot of Purell during long days inside grimy properties.

Alongside these boarded-up houses there are often homes occupied by people living on the edge of foreclosure themselves. Many of their stories involve illness, job loss or divorce—the triple whammies that fuel most financial tragedies. There's often another complicating factor: many of these families signed up for exotic mortgages they didn't really understand. "I just listened to people I shouldn't have listened to," says Kathleen Annese, a Massachusetts woman with a sick son. She and her husband pay more than 50 percent of their monthly income on an option ARM mortgage, a form of financing that never existed before the boom—and, God willing, will never be used again.

How best to help these homeowners and stabilize the overall housing market remains a matter of debate. One proposal would let new home buyers obtain mortgages at 4.5 percent; existing borrowers might be allowed to refinance at that rate as well. For delinquent borrowers, federal officials have discussed ways to make it easier to obtain loan modifications that would make payments more affordable. With luck, the new administration will implement these proposals. And if there is any silver lining to the housing crisis, it's that we're all receiving a harsh lesson that when it comes to financing our homes, "keep it simple, stupid" is a good maxim—and that as job losses continue to rise, the best kind of mortgage is ultimately the smallest one possible.