Foreclosures: Rescue on the Way?

The U.S. House last week passed a mortgage rescue package that could save half a million American families from losing their homes to foreclosure and do so at little risk to taxpayers.

The plan, though larded up with tax breaks that the Senate should trim, generally is a sensible approach to the subprime mortgage mess. President George W. Bush is threatening a veto but hinting at compromise. With a little tinkering, the Senate could get this rescue on the road.

The plan is the brainchild of House Banking Committee Chairman Barney Frank, D-Mass., and heavily relies on a resuscitated Federal Housing Administration.

Long before the subprime madness, would-be homebuyers who had little in the way of savings and questionable credit had to rely on the FHA to back their mortgage applications. FHA mortgages involved lots of red tape, mostly because the FHA insisted on lending to people who actually could make the payments.

Subprime lenders then entered the game, making adjustable-rate loans with low "teaser" rates to almost anyone who could sign his name. Then they sold these mortgages to banks, which repackaged them as mortgage-backed securities and unloaded them on unsuspecting investors.

The scheme worked fine as long as housing prices continued to rise. But when the teaser rates expired, many mortgage holders discovered they no longer could afford their monthly payments. The housing bubble burst.

Mr. Frank's plan would allow the FHA to guarantee refinanced mortgages at rates the homeowner could afford. But the current lender — the one who made the suspect loan — would have to take a significant loss, reducing the loan to 85 percent of the current value of the house.