Homeowners ask: Where is my bailout?

John W. Schoen Senior producer • Profile • E-mail

Since the mortgage mess began unfolding two years ago, homeowners losing their homes have been asking: Can nothing be done to stop this? Now, with the government spending or committing trillions of dollars to rescue the financial system, hundreds of readers are asking: Where's my bailout?

With the Obama administration set to announce details of a comprehensive foreclosure prevention plan Wednesday, their wait may soon be over.

I have been waiting patiently for some sign that there might be some relief for my daughter and others like her who are in danger of foreclosure. To date, I’ve seen a lot of money doled out to corporate America but have seen not a drop trickle down to the taxpayer. It’s been too long – what’s the president waiting for?
— Karen, Springfield, Mass.

Since the housing bubble burst two years ago, the government’s response — supported by a substantial segment of the public — was that lenders and borrowers made this mess and that they should work out solutions on their own. Judging from the Answer Desk inbox, many readers still think that should be the government’s policy.

But it’s rapidly becoming clear that the collapse of the U.S. housing market is taking the rest of the economy down with it — both here and around the world. It’s a vicious downward spiral.

Home foreclosures create big losses for banks, which no longer collect monthly payments and have to sell the foreclosed house at a big loss. Those forced sales push everyone else's home price lower.

Homeowners squeezed by bad loans with exploding interest rates might be able to make those payments if they could refinance to an affordable rate, but their home is now worth less than their mortgage. Rising unemployment is expanding the pool of homeowners losing their homes. Anxious consumers across the board are cutting spending, pulling the economy lower, forcing more layoffs.

Everyone — homeowners, bankers, community groups, federal, state and local officials — now agrees on one thing: The measures we’ve tried so far just aren’t working. The new administration met last week with many stakeholders to try to work out more aggressive solutions, details of which are expected to be announced Wednesday. Some banks, along with government-owned lenders Fannie Mae and Freddie Mac, have stopped foreclosing on homes until that plan is finalized.

One of the most contentious elements has been the issue of fairness to those homeowners who are struggling but still managing to make their payments. Why should my taxes, these homeowners ask, go to pay someone else’s mortgage when I’m having trouble paying mine?

It’s a fair question, and one the White House is also trying to answer as it works out the details of its plan.

As we reported last week, one idea being considered would involve the government buying up mortgages that are bigger than the underlying value of the home, getting a discount from the banks or investors who hold the loan. The government would then refinance the loan, based on the current, fallen home value, allowing the homeowners to make more reasonable payments. The new, less risky loan would then be sold back to investors.

If the government paid fair market value, it wouldn’t lose taxpayer dollars. True, banks or investors would have to book a loss, but since home prices aren’t going back to boom-era prices any time soon, they’ve already suffered that loss.

We'll know more Wednesday. No matter what's in the plan, it won't be a quick fix. Given the scope and complexity of the mess, it's going to take a lot more time and inflict a lot more pain before it's cleaned up.

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