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Foreclosure Truths and Getting Ready for Geithner’s Next Plan

The stakes are high for the next roll-out of a new financial plan by Treasury Secretary Timothy Geithner and the Obama Administration. In the midst of a House Financial Services Committee hearing Wednesday to question top banking executives on their use of money from the Troubled Assets Relief Program, the Office of Thrift Supervision announced that banks had agreed to suspend foreclosures for three weeks. During that time period, apparently, Treasury and the Obama administration will put final touches on their effort to help homeowners and stop foreclosures — the missing piece from the bank rescue plan Geithner announced Tuesday.

First of all, as we’ve written before, moratoriums on foreclosures don’t do much, except for kicking the problem down the road. But we’ll keep an open mind here, since this plan is supposed to be the plan-to-end-all-plans, the final loan modification standards that will end the logjam that has held up all other efforts.

Based on the roll-out of the bank rescue effort, I can think of three things that most likely won’t be in the plan because they would require the acceptance of some unsettling hard truths — even though all of them will be necessary to ensure the success of a foreclosure plan.

First, the administration should just come out and acknowledge that any plan will be unfair. People who’ve kept current on their mortgage payments, or didn’t buy an expensive house beyond their reach, won’t be rewarded. Some people who bought houses they shouldn’t have, and who didn’t make the mortgage payments they agreed to in their contracts, will get help. It’s unfair, but an unending tide of foreclosures is killing the economy, and something has to be done, for the greater good. Obama has said he’ll announce the plan personally, and he needs to note that while it’s true some borrowers who probably don’t deserve it will get to stay in their houses, avoiding foreclosures benefits everyone — by ending neighborhood blight, stopping house prices from falling, and stabilizing banks. Everyone knows this, but it would make the plan more credible if the administration admits it up front.

Second, not everyone can be helped. Some foreclosures will be unavoidable. It’s unreasonable and unrealistic to expect servicers to modify loans that will go into default anyway. Some people still won’t be able to afford their homes, even with lower monthly payments, because the homes were too overpriced to begin with. And house prices continue to fall. The worst outcome would be to modify hundreds of thousands of loans, then see house prices fall and homeowners find themselves underwater once again. In markets where the housing bubble grew completely out of hand, some borrowers simply aren’t going to be able to afford the homes they are in, no matter what. And that needs to be said.

Which brings us to the third hard truth. Renting is the overlooked option here. Government policies have focused for decades on supporting homeownership, and this must change. Homeowners who can’t be helped by modifications and will still lose their homes need alternatives, and the government can help by turning its focus to policies to support safe, decent and affordable rentals. It’s the new reality of the housing market, but the government continues to lag behind.

So there you have it. Don’t expect to hear any of this. The plan will likely be sold as a breakthrough — as government’s way of helping as many people as possible to stay in their homes. That will be true, of course. But when it comes to foreclosures and rescue plans, it’s not actually the hard truth.

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