Foreclosures: A Call to Action

PAUL KRUGMAN

In today's Times, Gretchen Morgenson has a frightening piece about the troubles facing many homeowners, headlined "Mortgage Maze May Increase Foreclosures."

I'll write a column about this soon, but I thought I should get the word out now that this isn't just a sad story. It's a call to action.

If a homeowner is fundamentally unable to pay his or debt, there's not much that can be done to avoid foreclosure. What's happening now, however, is that many borrowers who would in the past have been able to work out a mutually beneficial deal with their bank, restructuring the terms of their loan so as to avoid foreclosure, are now stuck. Their mortgage has been "securitized" — sold off to third parties, then pooled with many other mortgages and repackaged into various component parts. And because of the complexity of the securitization, there's nobody for the homeowner to deal with.

Regulators, and the Federal Reserve in particular, need to step in and serve as coordinators, ensuring that deals do get made when possible.

This wouldn't be at all unprecedented. The Fed and the Treasury stepped in to coordinate lenders to Latin American countries in the 1980s, acting to prevent a rush for the exits that would have led to widespread defaults. An emergency loan to Brazil in 2002 gave that country a chance to work its way out of a potential financial crisis. If we can rescue third-world economies, why can't we rescue American homeowners?

I hope that people at the Fed are working on this. If not, Congress should hold hearings and prod them into action.