Throw homeowners a lifeline

Four years into the housing bust, it's painfully obvious that the Obama administration's efforts to address the foreclosure crisis have failed.

A hodgepodge of federal programs has helped only a fraction of the millions in need. Billions of dollars appropriated for keeping people in their homes have gone unspent. Uncle Sam and lenders alike have moved at a snail's pace, unable or unwilling to cut through the tangle of red tape, perverse incentives and ethical quandaries that have so far defeated attempts at relief.

Meanwhile, every day, families experience the tragedy of losing their home while a gigantic overhang of anticipated foreclosures casts a chilling shadow over the housing market. As things stand, one in five homeowners owes more than his or her house is worth. On Long Island, the figure is only 5 percent, but 10 percent are three months behind on their home loan, versus a national rate of 8 percent. Nationally, homeowners who are underwater have a collective deficit of roughly $750 billion.

As these numbers show, the hangover from the real estate bubble continues to disable our economy. Doing something -- anything -- about this was never going to be easy, even with the best of intentions. Yet that's no excuse for the pathetic inadequacy of efforts to date.

It's time for the administration to try a new and comprehensive approach. It's in a good position to do so in the wake of the financial crisis, since 90 percent of mortgages issued nowadays are guaranteed by Uncle Sam, mostly via Fannie Mae and Freddie Mac, both now government wards. This gives Washington unprecedented power over residential lending.

First, the government needs to help millions of underwater homeowners refinance. The main thing keeping them from doing so on their own is a lack of home equity, but this is silly; refinancing actually reduces lender risk by making a loan more affordable. Lowering monthly payments in this way would enable many hard-pressed families to stay in their homes -- and give them more money to spend, which will stimulate the sagging economy. Banks might cry over the lower interest they'd receive, but they will cry even harder if underwater homeowners walk away, as they may well do absent payment relief.

Second, it's time to overcome our national phobia about reducing the mortgage principal of underwater homeowners. Done judiciously, this can stave off a tsunami of foreclosures, rescue millions from the indebtedness that is crushing consumer spending, and get housing back on the road to recovery. It will also help save neighborhoods from the blight of empty, untended homes.

Admittedly, this is controversial. Unlike refinancing, which is available to homeowners who aren't in trouble, wiping out some principal raises hackles -- and fears of a gold rush among the unworthy. Yet lenders surely know that, like the debt of Greece, much of this mortgage debt will never be repaid.

But loan relief shouldn't be granted for free. A principal reduction might be given only in exchange for a share of any later profit when the house is sold. A homeowner could also be compelled to give a lender the right to come after all his other assets in a default, instead of just foreclosing on the house.

Limiting relief to folks whose houses have fallen only 10 percent or 15 percent below what's owed would focus help on those likeliest to manage, while diminishing the sense that improvidence is being rewarded. Homeowners deeper in the hole could surrender their deed in exchange for a multiyear lease that would keep them at home -- as renters -- while keeping their house from adding to the glut already on the market. Any later sale could give them a right of first refusal.

A comprehensive homeowner rescue program will require incentives for lenders and, probably, changes in law. And it will cost billions. But allowing these hurdles to stand in the way will only condemn our economy to the doldrums -- and too many families to foreclosure -- for years to come.