The administration says that its scheme does not reward people who recklessly borrowed too much. This is untrue: the plan will certainly help some people who borrowed more than they should have. No doubt, it would be fairer to help only borrowers whose standard repayments (after teaser rates expired) were no more than say 30 percent of gross income to begin with, and/or who borrowed less than 80% of their property's initial value--in other words, to help only borrowers who behaved prudently, and who are now in trouble because their income has fallen. But of course this would have meant many more defaults. Because foreclosures also hurt innocent bystanders, there is a public interest in limiting them. The second part of the plan, I think, is indeed unfair and does raise moral hazard concerns--but I'd say that is a price worth paying if it stems the tide of foreclosures.

Will it succeed in doing that? It certainly gives loan modification a much firmer push than seen up to now. Lenders will not be forced to modify, but TARP beneficiaries will have to apply the guidelines, and show that they are making an effort. The new prospect of bankruptcy-court cramdowns (this requires legislation) should also help to focus minds. A standard Treasury-endorsed modification template ought to ease some of the worries servicers have about being sued by investors over unauthorized modifications of securitized mortgages. An important question is how far cuts in repayments will be achieved by interest-rate reductions as opposed to cuts in principal. Many observers reckon that principal reductions would curb foreclosures more effectively. The plan sees principal reductions as a possibility, but the incentives appear to grant that method of reducing repayments no special favors. Maybe this will have changed by the time we get full details of the plan next month.

The third part--$200 billion of new capital for the GSEs--improves Fannie's and Freddie's ability to buy mortgage-backed securities, supports the market value of those securities, and keeps downward pressure on the interest rates lenders charge mortgage borrowers. This too makes sense.



I'm sure the plan will reduce the rate of foreclosures--as compared with a no-plan baseline. How much it will reduce them, and whether that will be enough to stabilize the housing market, is impossible to say just yet. But after many months of almost total neglect, this is a big step forward.