Editorial: Mortgage crisis upon us

Wednesday, Oct. 17, 2007 | 7:25 a.m.

Responding to the gathering mortgage crisis, which is now fully understood to be a threat to the national economy, the Bush administration and Congress are mulling similar proposals.

Most have to do with allowing struggling mortgage holders to qualify more easily for government-supported refinancing, and with ways to provide consumers with honest financial counseling.

But these measures will not be enough given the depth of the crisis - more than 2.2 million risky loans were made from 1998 to 2006. Government-backed refinancing, given budget and staff constraints, could serve only a fraction of that number.

Treasury Secretary Henry Paulson on Tuesday called on the whole financial industry to get behind a program called Hope Now (www.hopenow.com). This is a program being driven by a few large lenders.

Paulson is optimistic that this private initiative, if enough lenders cooperate, will enable great numbers of borrowers to avoid foreclosure.

"We have an immediate need to see more loan modifications and refinancing and other flexibility," Paulson said in a speech aimed primarily at lenders.

The mortgage crisis is especially acute in Nevada, whose foreclosure rate leads the nation's. The crisis developed when home prices began rising. Lenders, many of them unscrupulous, then got creative with mortgages, arranging low payments for the first few years.

Many low- and modest-income home buyers were told that the homes would quickly increase in value, enabling them to use that equity to refinance before higher rates kicked in. Speculators and families fell for that, not foreseeing the inevitable bust in the housing market. When home values instead dropped in a few years, refinancing was not possible and they are now facing higher mortgage rates they cannot afford.

If nothing is done, the foreclosure rate will accelerate in coming months, greatly depressing the national economy.

Perhaps if Congress acts speedily to bring more at-risk borrowers under the umbrella of a restructured Federal Housing Administration, and if enough private lenders respond to Paulson's appeal, the economy can avoid a worst-case scenario.