On the Road to Relief

What the president did not mention is that previous efforts to provide mortgage debt relief — by his administration and his predecessor’s — have all come up short. The new plan will require constant monitoring by the administration and midcourse corrections if, say, the rules for homeowners turn out to be overly restrictive or the banks lard up the new loans with excessive fees.

Still, the new rules are welcome because borrowers, the housing market and the broader economy need all the help they can get. An estimated six million Americans have already lost their homes in the bust, in many cases, because of a combination of joblessness and falling home prices that made it impossible to keep up with payments, or to sell at a profit or refinance to better terms.

Under the plan, borrowers who owe more on their mortgages than their homes are worth, or who have only a small amount of home equity, will be able to refinance, as long as their loans are owned or backed by Fannie or Freddie, and as long as they have not missed a payment in the last six months and haven’t had more than one late payment in the past year.

Until now, Fannie and Freddie, which were taken over by the government early in the financial crisis, have balked at refinancings for any underwater borrowers, insisting that it was their duty to taxpayers to collect every possible penny of interest from borrowers.

It is their duty to shield taxpayers from losses. But they had missed the big picture. Defaults and foreclosures ultimately cost more than a refinanced loan in good standing and impose huge costs on the broader economy because they push down home values for everyone.

The new refinancing plan is still only a modest fix. Currently, some 14.5 million borrowers are underwater, on average, by $50,000. Of them, private analysts estimate that between 1.5 million and 2 million will qualify to refinance under the new standards.

Real recovery, in the housing market and in the economy, will require reducing the principal balance on many underwater loans. That would help to stanch defaults and foreclosures by restoring equity to borrowers as well as lowering their payments.

Fewer foreclosures would help to halt the decline in home values, replenishing battered property tax coffers. Restoring home equity is also crucial to getting consumers to spend again. But banks have balked at reducing principal because they don’t want to face up to the losses.

For too long, President Obama has relied on the banks to do what’s right. That hasn’t worked. Strong political pressure and likely legislation may be the only way to get the banks to accept write downs of principal.

Mr. Obama needs to start pushing now. He needs to explain that until many more Americans get out from under excessive debt, the rest of the economy won’t recover.