Aim for the middle ground

Aim for the middle ground

Orlando Sentinel: The leading presidential contenders are miles apart on how the federal government should respond to the mortgage crisis and the prospect that hundreds of thousands more Americans could lose their homes to foreclosure. Republican John McCain has declared “it is not the duty of government to bail out and reward those who act irresponsibly.” Democrats Barack Obama and Hillary Clinton both have called for ambitious federal rescue plans.

As is often the case, the best path lies in the middle.

The financial woes that began with subprime borrowers and their lenders already have hurt the broader economy by depressing housing prices, squeezing credit and pummeling consumer confidence.

A hands-off approach now would invite more collateral damage. Prudent borrowers and lenders would be among the victims, because foreclosures lower the values of neighboring properties and raise crime rates.

But an unconditional and overly generous housing rescue would spare reckless borrowers and lenders any consequences of their actions at the expense of all taxpayers. It would make similar crises more likely in the future.

Sensible proposal

The U.S. House and Senate banking chairmen have proposed letting the Federal Housing Administration guarantee refinanced mortgages for lenders who reduce the principal and ease the terms for homeowners who owe more than their property is worth. Lenders would recoup some of their losses if the houses eventually resold at a higher price. This approach makes sense, with limits.

Such an initiative shouldn’t extend beyond the current crisis. It should be reserved for homeowners who can’t afford their current mortgages, but are good bets to keep up with renegotiated ones. It shouldn’t be available for anything other than primary residences, to keep out condo flippers and other speculators. It shouldn’t be offered to wealthy homeowners or made available for expensive houses. Eligible homeowners should be barred from taking out second mortgages or home-equity loans.

It’s possible for lawmakers to go too far in trying to help. Some Democrats have proposed allowing bankruptcy judges to rewrite mortgages. As critics have pointed out, the risk for lenders would lead to higher interest rates and a heavier burden for new borrowers.

Without waiting for Congress, the government already has moved aggressively to prop up ailing financial institutions. The rationale for that intervention — to protect the broader economy — also argues for a well-targeted plan to help struggling homeowners.