Obama's Mortgage Plan Is What We Need

By DAVID A. PATERSON

What is sometimes lost in the public discussion of our current economic crisis, amid the $787 billion stimulus package and the multibillion dollar bailouts of banks and insurance companies, is the root cause. The economic downturn began as a mortgage crisis and will not end until we solve that problem.

The Obama administration seems to understand this. The president's Homeowner Affordability and Stability Plan, announced last month and designed to help up to five million families modify their mortgages to avoid foreclosure, lays out an effective strategy to address this problem. Therefore, it is incumbent on Congress and the states to work with the administration to implement this plan and address the crisis at its source.

The problem is dramatically worse today than when it began 18 months ago, magnifying the need for federal action. What started in the subprime sector, often with borrowers in mortgages that were inappropriate from inception, has now expanded to a broader group of borrowers. More homeowners with traditional, "safe" mortgages that were appropriate for their circumstances now find themselves unable to recover financially from a job loss, illness or divorce. Unfortunately, the decline in property values has in many cases eliminated the option to refinance to a lower rate mortgage with lower monthly payments.

Yesterday's report on foreclosure mitigation by the Congressional Oversight Panel, a five-member group tasked with overseeing Treasury's Troubled Asset Relief Program, is must reading for Congress and the administration as we embark on implementing the president's bold plan to stem foreclosures and restore stability to the housing sector. I am pleased that the panel membership includes my Superintendent of Banks Richard H. Neiman, who also leads our state's foreclosure prevention efforts.

The panel's report highlights the symptoms that gave rise to the housing crisis, as well as major impediments to a solution. The report correctly identifies the critical issue of affordability, as well as the interaction between affordability and negative equity, the potential hurdles for securitized mortgages, and the mortgage lenders and servicers' capacity for effective borrower outreach.

There is a critical role for the public sector to play in supporting efforts to preserve homeownership. Despite the fact that modifications are proven to be in the best interest of both the lender and the borrower, the voluntary efforts by the financial community have not been sufficient. The number of modifications has not kept pace with the rising volume of defaults, and too frequently past modification efforts did not lead to affordable long-term solutions. One study estimates that only 49% of loan modifications resulted in a reduced monthly payment, while 34% resulted in an increased monthly payment. This shows that in many cases the intent was not to reduce the monthly payments but to collect overdue payments through a repayment plan or recapitalization. Federal regulators report that over 50% of the current modification plans result in the borrower redefaulting within six months of the modification.

The president's plan includes provisions tailored to borrowers in diverse circumstances and takes account of the impediments identified by the Congressional Oversight Panel in a thoughtful and comprehensive way. It contains numerous incentives to encourage lenders and servicers to enter into loan modifications and to encourage borrowers to stay current on their modified mortgages. It also provides funds to communities and nonprofit groups to engage in outreach to eligible borrowers. Thus there is reason to expect that the plan will be considerably more effective than prior voluntary modification efforts alone.

There is no quick fix for the housing market and no plan will satisfy everyone, but doing nothing is not an option. No plan can help everyone. Some loans will not be eligible for modification, because they cannot be made affordable at current market rates. But for millions of borrowers at risk of foreclosure who are willing to work hard to stay current on their mortgages, modification will be a win-win. This will keep more families from being uprooted, prevent communities from being blighted by foreclosed properties, and halt further decreases in property values.

Critics of President Obama's plan claim it would force all American taxpayers to pay for the mistakes of a few. But failure to stem the foreclosure crisis affects us all, by putting downward pressure on real estate values and constricting the broader economy. Houses located close to foreclosed properties experience declines in value, and renters are being displaced as landlords default on their mortgages. State and local governments are experiencing more requests for social services while revenues needed to respond are down. Everyone in society is affected by these challenges -- this is not "someone else's problem." Now is the time to fix it; not to assess blame.

The president's plan complements the aggressive steps we have already taken in New York to prevent unnecessary foreclosures. But there is only so much that any one state can do to stabilize the housing market and keep people in their homes. We need an engaged federal partner with a national program to help restore our collective economic security. With the Obama administration's plan, I believe we have the right ingredients for that partnership.

Mr. Paterson is governor of New York.

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