Issue of the week: Paulson’s modest mortgage proposal

Sorry, we can’t help you, said Joe Light in Money. That, in so many words, is what Treasury Secretary Henry Paulson this week told millions of hard-pressed homeowners looking for interest-rate relief from Washington. With rates on an estimated $362 billion in adjustable home mortgages set to rise sharply in the coming year, Paulson told a housing conference that he was working “aggressively and quickly” to persuade financial institutions to freeze interest rates on hundreds of thousands of subprime mortgages held by marginally qualified buyers. While offering few details, Paulson did make it clear that any freeze would be voluntary by the mortgage industry, and would probably leave out “a large number of homeowners stretched by their mortgage payments.” The primary beneficiaries would be those who can afford their mortgages now, but won’t be able to afford them after their adjustable-rate loans reset to a higher rate. The plan, though, won’t help borrowers already behind on their payments, or those who can refinance into a fixed-rate loan.

The voluntary rate freeze is “the centerpiece of a market-based administration approach” to the mortgage crisis, said Michael M. Phillips and Ruth Simon in The Wall Street Journal. Suggesting that “the administration was already doing all it could to stem the nation’s mortgage woes,” Paulson said that the next steps were up to Congress and the states. For starters, he urged Congress to pass administration-backed legislation that would allow states to use tax-exempt bonds to refinance troubled subprime mortgages. Connecticut Democratic Sen. Christopher Dodd, a presidential hopeful, complained that the administration has “repeatedly failed to use the tools at its disposal” to protect homeowners who have been victimized by “abusive lending” practices.

The administration should get used to such complaints, said Andy Laperriere, also in The Wall Street Journal. “It won’t be long before demands are made—including from Wall Street—for a taxpayer bailout of homeowners facing foreclosure.” But such a move would “set a troubling precedent that would invite reckless behavior in the future,” while failing to prevent a further plunge in home prices. “Home prices were driven to unsustainable levels during the housing boom” because unscrupulous lenders and financially irresponsible borrowers “created artificial demand for housing.” Remove that demand, and prices will return to reasonable levels. That’s how markets work.

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Yes, but sometimes markets only create confusion, said Eric J. Weiner in the Los Angeles Times. That became clear in late October when a federal judge in Cleveland tossed out a foreclosure case because the bank suing to repossess some properties couldn’t prove that it held the mortgages on them. The bank, Deutsche Bank National Trust, owned securities related to the mortgages, the judge ruled, not the mortgages themselves. That’s what can happen in a mortgage-securities market that has grown “so complex that it’s become nearly impossible to know who owns the underlying properties in a typical mortgage pool.” If the Cleveland ruling holds up, it could lead to “long overdue” reforms of our financial system. Meanwhile, borrowers who face foreclosure should “do a little digging” to see who actually owns their homes. “It may turn out to be no one.”