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Above water?

Sunday, March 28, 2010; A14

DESPITE RECENT, tentative signs of stabilization, the housing market remains fragile, and that translates into insecurity or outright hardship for millions of Americans. Twenty-four percent of all homeowners with mortgages are "underwater," meaning that they owe more on the residence than it is worth. For those borrowers who are unemployed, this situation is especially devastating: They can't tap equity to deal with expenses, and they often can't sell if a job offer requires them to move. In many cases, it's cheaper to walk away and let the bank foreclose than to keep up monthly payments.

The Obama administration, like the Bush administration before it, faces a clamor for relief. But if there were an easy solution to the foreclosure crisis, someone would have found it already. Loan modifications remain the best option, but targeting them to just the right population so as to avoid rewarding irresponsible behavior is a lot easier said than done. Small wonder that the administration's signature program, the Treasury Department's Home Affordable Modification Program (HAMP), provided permanent payment relief to only 116,000 of 1.7 million potentially eligible cases through January.

On Friday, the administration announced a plan in response to those who say it must do more. Though billed in some headlines as a big expansion of mortgage relief, the plan is probably better thought of in the term used by the administration's own news release: a "refinement" of the existing program. The major changes involve more temporary loan forbearance for unemployed borrowers and incentives for creditors to offer write-downs of loan principal for underwater borrowers, instead of reductions in interest only. But these new steps still affect only the original HAMP target population of roughly 4 million households and -- crucially -- do not require principal write-downs as many of the administration's critics had urged. The Obama administration rightly resisted mandatory loan-balance reductions, which could have triggered unmeetable demands for similar breaks from other homeowners.

Taken together, the changes may indeed prevent a few more foreclosures than would have otherwise occurred. But the sad reality is that new foreclosures were far outpacing new loan modifications before the new plan came out, and probably will continue to do so until the wider economy begins to produce new jobs and stable, affordable mortgage rates. Economic weaknesses and government debt are what really ails the housing market, and for those ills, even the best-designed mortgage relief is a Band-Aid.

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