If home owners owed less

Give mortgage lenders credit: If nothing else, signing 10,000 potentially fraudulent foreclosure affidavits a month, as one team of "robo-signers" has admitted doing, reflects an admirable commitment to the task at hand.

Imagine if that same diligence were applied to helping some people stay in their homes.

Lenders insist they don't want to own homes, and data from the U.S. Treasury shows that they've stepped up their responses to requests for permanent mortgage modifications. As of Aug. 31, for example, nearly 500,000 U.S. homeowners had received permanent modifications to their mortgages through the federal government's voluntary Home Affordable Modification Program (HAMP). In most cases, that relief consisted of either a lower interest rate or a longer payment term.

But with anywhere from 3 million to 5 million mortgages delinquent and the pace of foreclosures rising again, lenders may need to resort to something they've largely avoided to date: reducing mortgage balances.

It is a politically unpopular option, sure to engender a backlash from anyone who has stayed current on their mortgage. At a congressional hearing earlier this year, a J.P. Morgan Chase executive said that reducing the amount owed would reward people who consumed more than they could afford while potentially raising costs for future borrowers.

Nobody is asking for across-the-board reductions in loan amounts. Foreclosure is inevitable in many cases, and anyone who has gone months without making a payment is probably not entitled to a reduced loan amount. But mortgage balance reductions, applied selectively and structured carefully, could ultimately reduce lender losses and help speed recovery of the housing market, home values and consumer spending, the thing that makes our economy go.

"In a crisis, you are faced with choices, none of which are ideal," said Alan White, an assistant professor of law at Valparaiso University School of Law in Valparaiso, Ind., who has studied mortgage modification efforts. "Right now, banks are losing 50 to 60 percent of their investment every time a foreclosed home goes on the market. With principal reduction they could recover 80 to 90 percent of that investment" on some properties.

Last weekend saw the auction of another 300 foreclosed houses. Hundreds crowded into the Minneapolis Airport Marriott Hotel to bid on properties that represented, in a microcosm, the staggering losses being experienced by homeowners, lenders, investors in mortgage securities and, for loans backed by Fannie Mae or Freddie Mac, taxpayers. They include:

•A two-bedroom home on a gritty corner of Howard Street in northeast Minneapolis. This house flipped five times between 1998 and 2005, including three times after a 2002 foreclosure. Total mortgage debt soared from $49,000 to $184,000 at the time of the second foreclosure, in March. Auction bid: $38,000.

•A tidy 1 1/2-story set on a hill in a quiet Robbinsdale neighborhood. The owner in 1994 had a $92,843 mortgage at a fixed rate of 8.5 percent. The most recent sale, for $203,000, occurred in 2004. When it was foreclosed on last year the first- and second-mortgage debt totaled about $260,000. Auction bid: $81,000.

•A south Minneapolis bungalow -- two bedrooms, one bath, 1,000 square feet -- that sold for about $62,000 in 1996. Kelly Herrick bought it for $123,450 in 2001. Five years and four refinancings later, her total mortgage debt had ballooned to about $250,000, with monthly payments totaling $1,800.

Though Herrick said she poured a lot of the proceeds from her various refinancings into the house itself, including new windows, a new furnace and central air conditioning, "I made a lot of mistakes," she said. She kicks herself for believing that her home was doubling in value, even if lenders that solicited her business made it easy to believe.

The deal ultimately offered by her lender, Bank of America's former Countrywide unit, actually raised her monthly payment, and included a $3,500 refinance fee.

The foreclosure occurred last November, and Herrick moved out in June.

The Nokomis Avenue property received a bid of $55,000 last week, or roughly the price it sold for in 1996. If accepted, the lender on the second mortgage will receive nothing. Ditto for Bank of America after factoring in commissions and other costs, including the time it went without receiving any mortgage payments.

"When I saw the auction sign go up I thought, 'This is so sad,'" Herrick said. "I could have stayed there if the bank had been willing to work with me even a little bit."

Herrick drives by her former home almost every day because she rents a place nearby. She pays $1,450 a month.