Quinn: 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.

Last month, the Senate passed a bill that pretends to be mortgage relief. In truth, it's mostly a tax-cut bill, with goodies for home builders (to bail them out of losses), a $7,000 tax credit for people who buy foreclosed homes (which gives them an unfair advantage over neighbors not in foreclosure who are also trying to sell) and an extra deduction for homeowners who use the standard deduction (they probably have paid-up mortgages, meaning they're not in trouble). It must be an election year.

The House has a more targeted package. It's hoping to encourage lenders to take a loss on loans in distress by reducing them to an amount that borrowers can afford. The carrot, says Rep. Barney Frank, is an FHA guarantee that the remaining mortgage would be paid in full. The government would share in the home's future appreciation (if any!).

Sheila Bair, chair of the Federal Deposit Insurance Corp., thinks that none of these plans can handle loans rapidly and in bulk. She'd use federal money to pay off 20 percent of a distressed loan if the lender will lower the amount the borrower owes. The Feds would be repaid when the house was sold. But again, lenders aren't yet losing enough to agree.

The public in general opposes help for homeowners in trouble: it's their own fault, let 'em rot. The risk is that we'll all rot together, says economist Mark Zandi of Economy.com. Unless substantially more loans are saved, the recession will hurt more than we expect.

Quinn: Is Anyone Going to Save Us? | Business