Forestalling Foreclosures

But if the idea is to package them with hundreds of other liens, then all you really need to know is what they will be worth, on average, after all the houses are finally sold. And before too long, that calculation won't be made by Fannie or Freddie. It will be made by investors who buy and sell the packages of liens on Wall Street's credit markets, just as they do every day with trillions of dollars of options and derivatives contracts, which have many of the same uncertain characteristics.

By now you're probably wondering why the various parties would be interested in getting involved with all this. The answer is pretty simple: They would all come out better off than if they were forced to go through foreclosure.

Borrowers would get a chance to stay in their homes, with an affordable mortgage and the opportunity, albeit reduced, to begin rebuilding some equity in the property and profiting from any appreciation in property values. They would also be able to avoid a big blot on their credit history.

As for the lenders, this kind of workout would be of interest only in cases where the proceeds they would receive from foreclosure would be insufficient to pay back the full amount of the loan. That would be most obvious in the case of a loan that is larger than the value of the house that secures it. But this mechanism would also be worthwhile in cases where the house may be worth a bit more, because of the added cost of going through the foreclosure process, which can often amount to 15 to 20 percent of the value of a loan.

In addition, the whole industry -- to say nothing of the whole economy -- would benefit if house values were not further depressed by a rash of foreclosures that suddenly puts hundreds of thousands of homes back on the market.

This isn't an entirely original idea -- it's a second cousin of the "Brady bonds" used by the first Bush administration in the early 1990s to help solve the Third World debt crisis.

But while this is a market solution, it is not one that the market is likely to serve up without the intervention of Fan and Fred. No other entities have the knowledge or the market influence to set the standards for the new instruments or the resources to create a liquid market for them. It is what they were invented for and what they do better than anyone else.

But the companies probably couldn't launch such an initiative without the approval and encouragement of the Bush administration, which hasn't come up with any better ideas but somehow still can't seem to get past its free-market hangups about government-sponsored enterprises.

So, over this Labor Day weekend, when you hear the president or Treasury secretary or their fellow travelers at the Federal Reserve declare they are doing everything they can to deal with the mortgage crisis, remember the old Gershwin song: It ain't necessarily so.

Steven Pearlstein can be reached atpearlsteins@washpost.com.