A helping hand

Oregon Sen. Jeff Merkley was as stunned as anyone when the news broke last fall that the Federal Reserve had quietly loaned big banks $7.7 trillion to help them weather the financial meltdown in 2008 and 2009. Why, he wondered, could the Fed loan that much to the banking industry, but not provide any relief to homeowners who saw their equity go negative through no fault of their own?

Merkley set about working on a plan to provide that relief, and last week he released a white paper laying out an ambitious proposal.

Merkley's plan is thorough, well-designed, and would cost taxpayers nothing. Congress and the White House should give it favorable consideration.

The plan is aimed at ordinary homeowners who are current on their mortgage payments but owe more than their home is worth, and who don't have a government-backed loan. Lenders won't renegotiate mortgages that are underwater.

A homeowner with a mortgage held by Fannie Mae or Freddie Mac is eligible to refinance under government programs, but other homeowners are stuck — Merkley's term is "trapped" — making payments on homes they cannot sell, in many cases at higher interest rates than are otherwise available.

Merkley's plan would have the government — the Federal Reserve, the Federal Home Loan Bank System or the Federal Housing Administration — sell Treasury bonds to create a trust that would buy current but underwater mortgages from lenders. Because the federal government can borrow money at the lowest possible rates, refinancing these loans at 4 percent or 5 percent would make the government a small profit, meaning no tax dollars would be needed.

The homeowners would choose a 30-year fixed loan at 5 percent, lowering their monthly payments; a 15-year loan at 4 percent, allowing them to rebuild equity faster; or a combination of a first mortgage for the home's current value and a "soft second" mortgage for the rest, with payments and interest deferred on the second for five years.

These are not home buyers who took out huge mortgages on homes they could not afford. They are not in foreclosure. They are making their payments. But the value of their homes dropped when the housing market collapsed, in many cases a few years after they bought the home — before they had time to build equity. And they number in the millions — 80,000 homeowners in Oregon alone are underwater but making their payments.

Merkley says pilot projects could be started with unspent money left over from mortgage relief programs that have not worked as intended, and the pilot projects could be conducted without legislation by Congress.

That's a start; fully implementing the plan would take congressional action. It should get prompt attention from both parties in Congress.

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