Why Won't Treasury Fix Your Mortgage?

Here's an idea: Instead of paying reluctant lenders to modify mortgages for borrowers in over their heads, maybe the Treasury should just step in, buy up the loans and fix them itself.

Wall Street Journal mortgage reporter James Hagerty relays this very idea from John Taylor of the National Community Reinvestment Coalition. The feds would buy the loans at a discount and rework them to reduce the principal that borrowers owe. The current Making Homes Affordable program doesn't push for this all-important step, though lenders can reduce principal on their own if they choose to.

This is the latest variation on the Home Owners' Loan Corp., the 1930s government agency that bailed a million Great Depression homeowners out of foreclosure. Back then, mortgages lasted only three to five years, and then had to be refinanced. Millions of borrowers who were underwater – that is, who owed more than their properties were worth – had nowhere to turn for a new mortgage when their old one expired. So the government stepped in and sold them new loans, much smaller than their old mortgages. The average HOLC loan was – brace yourselves - $3,028.