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The Sobering Reality of the Foreclosure Crisis

The New York Times takes a swipe at the Obama administration today, in a sobering editorial warning that more needs to be done to address the alarming number of Americans continuing to lose their homes to foreclosure.

The editorial notes a reality that is coming increasingly into focus: Loan modification programs that reduce monthly payments may not be effective, because the bigger problem is negative equity. Millions of Americans owe more than their homes are worth, and can’t tap them for cash in emergencies, such as job losses. But the Obama administration’s anti-foreclosure plan, The Times says, does little to address this:

One of the biggest problems is that the plan focuses almost entirely on lowering monthly payments. But overly onerous payments are only part of the problem. For 15.4 million “underwater” borrowers — those who owe more on their mortgages than their homes are worth — a lack of home equity puts them at risk of default, even if their monthly payments have been reduced. They have no cushion to fall back on in the event of a setback, like job loss or illness.

This page has long argued that a robust anti-foreclosure plan should directly address the plight of underwater homeowners by reducing the loans’ principal balance. That would restore some equity to borrowers — and give them a further incentive to hold on to their homes — in addition to lowering monthly payments. The mortgage industry has resisted this approach, and the Obama plan does not emphasize it.

The Times also noted that the latest figures show some 5.4 million Americans either delinquent on their mortgages or in some state of foreclosure, a staggeringly high figure. The Obama administration needs to step up its efforts to aid the middle class — or the financial crisis will have no end in sight.

There will be no recovery until there is a halt in the relentless rise in foreclosures. Foreclosures threaten millions of families with financial ruin. By driving prices down, they sap the wealth of all homeowners. They exacerbate bank losses, putting pressure on the still fragile financial system. Lower monthly payments are a balm, but they are no substitute for home equity. And until more Americans can find a good job and a steady paycheck, the number of foreclosures will continue to rise.

This editorial is significant, I think, because it takes on the Obama administration’s efforts in a much more critical way than in the recent past. Until now, the administration has largely been given credit for at least trying and allowing some of the anti-foreclosure efforts time to work.

The Times seems to be saying that waiting period is over — and it’s also questioning Obama’s much-touted middle class agenda, as it applies to the foreclosure crisis. It appears the gloves are coming off, prompted by the steady stream of Americans continuing to lose their homes. For the Obama administration, the grace period for its anti-foreclosure programs is coming to an end.

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