If prices continue to plummet, the homes of about 19 million owners will be worth less than their underlying mortgages by 2010. Credit Justin Sullivan/Getty Images

In the government’s ever-morphing efforts to save the financial system, the moment when the nation’s homeowners get rescued seems, finally, to be getting near.

John McCain has called for the Treasury Department to spend $300 billion buying up mortgages, and Barack Obama now favors a version of an idea he opposed during the primaries: a 90-day moratorium on foreclosures. Sheila Bair, the head of the agency that guarantees bank deposits, said last week that it was time for the government to shift its focus away from banks and do more to prevent foreclosures.

The idea of helping Main Street has an undeniable appeal. Housing is at the root of the financial crisis, and preventing foreclosures could bring a double-barreled benefit. It would allow families to remain in their homes and could also help keep the housing market from spiraling out of control. The more foreclosed homes that are dumped on the market, the more home prices will fall.

But before any of the various rescue plans reaches the point of inevitability — and these days, ideas can go from unlikely to inevitable in about 48 hours — I think it’s important to stop for a moment and consider how complicated any such plan would be. Every one of them, in fact, faces an inherent conflict: coming up with a large-scale homeowner bailout without also helping millions of people who don’t need help is almost impossible.

That’s a big reason that the various efforts to stem foreclosures so far, both from the Bush administration and Congressional Democrats, have been so modest. You just can’t solve the foreclosure problem without causing a lot of collateral damage — in the form of lavishing money on homeowners who can stay in their homes without assistance.

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And it’s not at all clear why such people should be at the front of the line for government help. Why are they more deserving than, say, the growing number of unemployed, many of whom rent their homes?

Given all the other imperfect emergency measures that the federal government has taken in recent weeks, it can certainly do more to stem foreclosures than it has. The Treasury Department’s $700 billion bailout fund, as it’s now structured, may spend almost nothing on troubled mortgages. “It’s a question of weights,” Alan Blinder, a former Federal Reserve vice chairman who has been advocating more homeowner help for months, told me, “and I’m really worried that zero is going to be the weight for mortgages.”

Zero, or anything close to it, may well be wrong. But the right answer isn’t quite as obvious as it initially sounds.


There are two separate groups of people who are at risk of foreclosure, and they often get muddled in any discussion of the housing crisis.

The first group is made up of people who, for whatever reason, will not be able to make their monthly payments. Some took out mortgages with initial monthly payments that they couldn’t afford. Others took out adjustable-rate mortgages whose monthly payments have ballooned to an unaffordable level. Still others have lost their jobs.

At the start of this month, almost 1.5 million homeowners — out of about 75 million nationwide — were in this category. They were at least two months behind on their mortgage payments. Mark Zandi, the chief economist of Moody’s, estimates that another five million or so will fall into the category over the life of their mortgage, as the economy worsens and more adjustable-rate loans reset.

The second group is quite different. It is made up of people who are at risk of foreclosure not because they won’t be able to keep up with their monthly payments — but because they may decide they don’t want to continue making them. These are the homeowners who are “under water,” which is to say their houses have lost so much value that they’re now worth less than the underlying mortgage.

Homeowners with an underwater mortgage face a choice. Many will stay put and keep making their monthly payments, because they see their house primarily as a home, rather than an investment. Maybe they love their neighborhood or their children’s school. Maybe they just don’t like the idea of reneging on a deal, as Brett Barry, a real estate agent near Phoenix, put it.

Others, though, are going to look at their home purely in economic terms and see an investment that may never pay off. Some of them will choose to walk away.

What matters, for the purposes of a bailout, is that the number of underwater homeowners is much larger than the number of people who will be unable to make their mortgage payments. Assuming that home prices still have a ways to fall, something like 19 million homeowners may be under water by 2010 (only a few million of whom will be struggling to make their payments).

Now, who should be rescued?

Let’s start by acknowledging that morality cannot be the main criteria, unfortunately.

The government has already passed the point of drawing fine moral distinctions and is now in the business of stabilizing the economy by whatever means necessary. Someone might argue, then, for rescuing everyone who might end up in foreclosure, regardless of the reason.

The problem with this approach — and it’s the heart of the problem with any big-time homeowner rescue — is probably obvious. As soon as the government announces that it will help everyone at risk of foreclosure, a lot of people are suddenly going to decide they’re at risk of foreclosure.

Homeowners who are under water will have an incentive to think of their homes in cold economic terms and threaten to walk away, while those who can just barely afford their monthly payments will have reason to slide into delinquency. Multiply 19 million mortgages by a couple of hundred thousand dollars, and the government could be left with $4 trillion in obligations.

The other day, I spoke with Sandi Lucia, a saleswoman in Northern California who had lost her job, has had to take a new one at lower pay and was now struggling to meet her monthly payments. Ms. Lucia seems committed to doing everything she can to keep paying her bills. But she also put her finger on the problem. “I want to keep paying my mortgage,” she said. “But if everyone is getting bailed out, what’s the point?”

In recent weeks, several intriguing ideas for helping homeowners have begun making the rounds. Mr. Blinder thinks the government should spend about half of the $700 billion bailout fund to buy and then refinance the mortgages of people who, based on their debt and income, appear to have little chance of making their payments. My colleague Joe Nocera has written about a plan that would allow homeowners to forfeit their deeds and rent their homes back from the bank. Ideas like these can be part of the solution.

But this financial crisis isn’t going to be solved by a magic bullet. It’s going to require a smorgasbord of programs — some aimed at homeowners in trouble, some aimed at the credit markets, some aimed at the job market — as well as a whole lot of time and patience.

The only way to stop the coming rise in foreclosures, at this point, would be a bailout of enormous proportions. And if we’re unlucky enough to get to the point when a $4 trillion program seems necessary to resolve the crisis, there would be a lot of ways to spend the money beyond devoting it all to underwater homeowners. They aren’t the only ones, after all, who live on Main Street.

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