First, Principles

Of all the lessons from our economic downturn, the first, most basic one has not really changed: unless and until we do something to solve the home lending and foreclosure mess, we can’t really hope to climb out of the hole we’re in.

Everybody knows that… right?

Of course, there’s knowing and there’s doing… and unfortunately, while the knowing we have a problem part seems a given, the doing is not so clear.

This week, the New York Times illuminated the problem with unwinding the foreclosure mess, talking about how the Obama plan to help homeowners is faring:

So far, two months after the program went into effect, about 55,000 homeowners have been extended loan modification offers, according to a senior administration official. At the same time, foreclosures continue apace. RealtyTrac reported Wednesday that foreclosure filings reached 342,000 last month, up 32 percent from April 2008. Moody’s has estimated that more than 2.1 million homeowners will lose their homes this year.

Not good. As Henry Blodget explains over at The Business Insider, that may make Obama better than Bush… but that’s a low bar, indeed:

The government's second iteration of a homeowner bailout is working better than the first one, but that's not saying much: The first Hope For Homeowners program modified about 50 loans.

The second iteration--Obama's plan--has resulted in 55,000 mortgage modification offers so far. Unfortunately, that compares to the 15.4 million single-family homeowners that are currently underwater (20% of the total), which is up from 13.6 million at the end of the last year.

Moreover, mortgage modifications aren’t necessarily working: even with adjustments to interest rates and payments, borrowers with modifications still return to default and foreclosure.

And the result is that foreclosure is accomplishing what nothing else appears able to: resetting and right-sizing the real estate market to home values well below what they were at the height of the boom.

What the foreclosure sales point to is really the only option that might salvage some homeowner loans: rewriting mortgages with new principles that reflect the home’s true value. This, of course, represents an enormous loss for lenders, which is why it’s been resisted on a large scale.

Still, with enormous numbers of mortgage resets still upcoming (while a bubble of subprime mortgages has largely happened, a large swath of “Alt A” loan resets are still ahead – and read this seminal post to understand the real problem in resets), plus a rising wave of commercial lending defaults, as well as a coming shock in the credit card market, debt problems are shaping up to be an even larger problem later this year (remember that when economists make sunny predictions about a “recovery” this fall). With only the slight possibility of touching 10 percent of the possibly 20 million borrowers who may slip into foreclosure this year, the government has little, if anything, to offer as a solution.

Complicating all of this is that the pain of foreclosure does not necessarily elicit a feeling of goodwill. Here and elsewhere, people have talked about the judgments made about unfortunate tales of bad loans, bad choices and struggles to climb out from bad debt… but the fact remains: sympathy for the foreclosed is in short supply. As much as the resistance to lowering principles, that lack of sympathy is draining efforts to widen foreclosure relief. And we’re fast approaching a moment where we run out of choices. Time, I think, to get back to first principles.

(Photo by thetruthabout)