The GOP's Real Doubts About Mortgage Aid

Just a day after signing into law the $787 billion economic stimulus bill, President Barack Obama turned his administration’s attention to the nation’s mortgage and foreclosure crisis.

The heart of the president’s proposal is a $75 billion pot of cash — read that “incentives” — to coax lenders and mortgage holders to work with troubled homeowners to stem the wave of foreclosures bubbling from the subprime crisis. He also announced the infusion of another $200 billion for Freddie Mac and Fannie Mae, the quasi-private (now government-owned) agencies that hold many of the nation’s mortgages.

House Minority Whip Eric Cantor, a Virginia Republican congressman, and his boss, Minority Leader John Boehner, have raised concerns about the scope and focus of the program, wondering if it doesn’t protect lenders and borrowers from the consequences of their risky behavior with the cost being borne by the millions of homeowners who’ve played by the rules. They’ve got a point, and we agree with many of their concerns.

According to the New York Times, almost one in 10 home mortgages are either delinquent or in foreclosure. The Times analysis concludes that up to 6 million families could lose their homes over the course of the next three years if Washington does nothing.

The first goal of the Obama plan is to provide financial help for homeowners who need to refinance their mortgages because their homes are “under water,” that is, they’re now worth less than the amount the original mortgage was for. The plan’s second goal is to provide assistance to approximately 4 million people at risk of losing their homes in the form of incentives to lenders to modify the loan terms to make them more affordable. The third piece of the plan is the $200 billion cash infusion into Fannie Mae and Freddie Mac to be used to jumpstart the housing market by buying more new mortgages.

The administration will dangle its $75 billion carrot before lenders to entice them to work with homeowners to modify the terms of troubled mortgages, incentives like $1,000 for every reworked mortgage. If the cost of the mortgage drops to 38 percent of the homeowner’s gross monthly income, more incentives such as a dollar-for-dollar match kick in to get it down to just 31 percent.

Reps. Boehner and Cantor, in their letter to the president, raise some very troubling and important questions about the plan, most aspects of which don’t require any action by Congress. What does it do for the more than 90 percent of homeowners who are having no problem with their mortgages and played by the rules from Day One? Do banks and lenders who OK’d mortgages that should never have been approved get rewarded? Will mortgage providers be required to verify income and other eligibility standards before modifying the mortgages in question? And what’s to prevent the very same homeowners, who get their mortgages modified, from winding up in the same position in six or nine months?

It is galling, to put it mildly, for the tens of millions of homeowners who played by the rules and didn’t buy more house than they could afford to see a couple of million folks whose eyes were bigger than their wallets essentially be let off the hook.

It is troubling, to put it mildly, for honest banks and lenders who held onto their high lending standards see their colleagues who gave mortgages to folks who only had a pulse and a heartbeat have their keisters pulled out of the fire.

That’s what makes the president’s mortgage proposals so difficult for so many Americans to swallow. President Obama’s going to have to do a lot more to sell the American public on the need for this plan than he’s done so far.