Bad Numbers

As the scale of the mortgage crisis grows, the relief so far looks inadequate.

LIKE CASUALTY reports from a war of attrition, statistics about the American residential real estate market keep coming in, each grimmer than the last. The most recent alarming number is this one from Moody's Economy.com: Nearly 8.8 million U.S. homes, or about 10.3 percent of the total, are worth less than their owners owe on them. They're "upside down," in real estate parlance. The figure suggests that the subprime mortgage crisis may have metastasized into a general housing crisis -- long before the country has even worked through the predicted subprime foreclosures.

As with all scary figures from the economic front, the Moody's number has to be considered in context. The estimate includes not only primary but secondary residences such as country cottages and beach houses. It does not distinguish between houses whose loan-to-value ratio is only modestly negative and those that are deeply in the red. Most people who can afford their monthly payments and don't need to sell soon will be able to keep a roof over their heads.

Still, the Bush administration itself conceded recently, at least implicitly, that mortgage woes have spread dangerously. It announced a new program with a desperate-sounding name: Project Lifeline, aimed at borrowers who are 90 days or more behind on any kind of home loan. Supported by six of the country's largest mortgage lenders, the program offers a 30-day foreclosure suspension, during which time borrowers can attempt to work out new loan terms. Project Lifeline comes on top of previous administration efforts that also rely on voluntary loan modifications. The Hope Now Alliance, an administration-brokered partnership of lenders, servicers and mortgage-backed bond holders, reports that it helped 545,000 subprime borrowers during the second half of last year.

This was better than expected, and Hope Now is gaining momentum. But it has still only reached 7.7 percent of the 7.1 million subprime loans outstanding as of September. More than two-thirds of those who benefited from the program did not receive loan modifications, only a chance to catch up on missed payments. Loan modification goes against both the short-term economic interest and the institutional culture of loan servicers, the collection companies that are supposed to do the actual workouts. Fears of investor lawsuits still hinder these companies. And even those servicers who want to help are short-staffed. Meanwhile, as The Post's Renae Merle recently reported, suspicious borrowers often evade phone calls and letters from their creditors.

Voluntary loan modification remains the best solution for the subprime crisis: It provides the most benefit to consumers who need and deserve it most, at the least cost in federal dollars and ruptured contracts. But the modest results of this approach so far may indicate that it is simply not practical; far-flung borrowers, lenders, servicers and investors may be too difficult to organize fast enough to deal with preventable foreclosures. The burden is now on the various industries and the Bush administration to show that the current policies can, indeed, work. Otherwise, there may be no choice but to adopt one of the legislative remedies under discussion in Congress -- and which we will assess in a subsequent editorial.