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Editorial: Lenders play key role in subprime cleanup

Mortgage companies can help U.S. avoid a costly bailout.

Last update: October 25, 2007 - 7:24 PM

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" Some [lenders] have said publicly that they plan to work with borrowers to modify their loans and avoid foreclosure. But more needs to be done, and done sooner rather than later. Frankly, I'm frustrated that the servicing restructuring has not reached the level that I had hoped it would.''

Sheila Bair, chairman, Federal Deposit Insurance Corporation, in an Oct. 4 speech in New York.

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It's encouraging to see signs that the mortgage industry is taking its share of responsibility for the subprime lending mess.

Countrywide Financial Corp. stepped up this week with a plan to offer 82,000 customers -- including several thousand in Minnesota -- a chance to adjust mortgages to avoid potential foreclosure.

The program makes good business sense for Countrywide because it will allow the California-based lender to hold onto loans it might otherwise lose. For well-meaning borrowers who are in over their heads with high-interest loans, cutting mortgage costs can mean the difference between making payments on time or defaulting.

Lenders such as Countrywide helped created the subprime problem in the first place, so it makes sense that they should be part of the solution -- a major part. The more this problem can be solved by the private sector, the less likely it is that a government bailout will be wise or necessary.

As the Wall Street Journal reported this week, about 35 percent of U.S. homeowners have no mortgage debt on their homes, and 95 percent who do have mortgages are paying on time. Even among those with subprime adjustable-rate loans, more than 83 percent are making payments on time.

That means that although subprime loans pose a growing threat for some lenders, borrowers and communities, these high-interest loans represent a fraction of the mortgage market. It also means Countrywide and other lenders can help borrowers restructure their loans without losing so much income that they put their businesses at risk. In fact, they may have more risk if they don't help.

One of the more reasonable national voices on the issue is Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation. Bair argues that some adjustable loans scheduled to be reset at higher rates should be converted to fixed rates.

"This would be no bailout," Bair wrote in a recent New York Times opinion piece. "These borrowers would still be required to make their monthly payments -- at rates higher than what prime is today. Billions in savings would be generated by avoiding the administrative, legal, marketing and other costs of foreclosure ... ."

There's a lot of activity in Washington aimed at cleaning up the subprime problem and preventing it from growing. But even the best legislation won't have the impact that can be achieved when lenders work with borrowers to come up with affordable solutions.

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