The wagons are circling around a foreclosure prevention strategy.

It now seems as if there is agreement on what government should do to help the estimated ten million homeowners whose mortgages are in trouble and whose current house value is less than the outstanding mortgage. Even John McCain, who had said he did not want the government to bail out those who made bad decisions, has now come on board.

The basic strategy is that the lender will agree to reduce the principle of the loan to less than the current house value, which will give the borrower some equity in the house and reduce mortgage payments. In return, the government (through the FHA–Federal Housing Administration) will insure the mortgage so that if the borrower defaults, despite the new arrangement, the lender will be paid off.

The administration, the Congress, both Democratic candidates and (now) John McCain seem to agree on the basic principle. But the devil is in the details and they make a big difference.

Congress, McCain and Bush all have different requirements for who will qualify and how much the FHA can commit. Under Bush’s plan only 100,000 homeowners will be helped. McCain’s plan will help between 200,000 and 400,000 people, while the House of Representative’s plan will help from 1 million to 2 million!

House Financial Services Committee Chairman, Barney Frank, says his plan will commit the government to insuring about $300 billion in mortgage debt, but he thinks that in the long run, the government will make money as premiums on that insurance should exceed payoffs.

While we have all along felt that the best thing to do would be to give bankruptcy judges the right to “cram down” interest rates and/or principle on mortgages when people file bankruptcy, that plan is not going to fly as it caused lenders to hyperventilate. This plan is probably the next best thing, and it looks as if it is going to fly. Let’s hope they settle on something that is closer to the Frank plan than to Bush’s anemic idea.

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