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Globe Editorial

Plenty to do before Jan. 20

November 23, 2008
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THERE ARE STILL 59 days left before Barack Obama takes office as president, and neither the troubled housing market nor the economy as a whole should be left to drift until then. Treasury Secretary Henry Paulson is wrong to blow off Federal Deposit Insurance Corp. chief Sheila Bair's plan to stave off foreclosures. By modifying loan terms, Bair would keep 1.5 million borrowers in their homes - and slow the plunge in housing prices that precipitated the economic crisis.

Under the $700 billion federal bailout plan, Paulson has the money and the authority to put Bair's plan into action.

So far, efforts to persuade lenders to work with delinquent borrowers on a case-by-case basis have yielded little progress. Bair would target a broad class of borrowers who are behind on their payments but could keep up with modified terms. Monthly payments would be reduced through lower interest rates and, in some cases, by extending the terms of a loan. If borrowers default under the new terms, the government would share some of the loss.

The plan has been tested: The FDIC restructured a number of loans on similar terms when it took over the failed bank IndyMac. Used on a larger scale, the plan could avoid the blight that takes over neighborhoods when too many foreclosed homes are dumped on the market at the same time. Home values could well continue to fall - but a slow decline would be healthier for the economy than a precipitous drop.

Paulson shouldn't just punt Bair's proposal to Obama's administration. And Obama cannot take the initiative on economic matters until he is sworn in.

Plenty can still go wrong during the waning days of George W. Bush's presidency. Sixty days ago, Wall Street and Washington were still hammering out details of a bailout plan intended to keep the world's credit markets from freezing up. Since then, the federal government has partially nationalized several major banks, General Motors has reached the brink of bankruptcy, and the Dow Jones Industrial Average has lost a quarter of its value.

Perhaps it's optimistic to expect much from a lame-duck administration. But the economy is in a parlous state, and pressing questions need to be answered. Do financial institutions have a handle, even now, on how many toxic loans and securities they own? Some banks have received bailout money but aren't making new loans. Why not? And for Paulson: Since the economic crisis began with delinquent home loans, what is wrong with using bailout money to keep more such loans from turning sour?

What's clear is that homeowners need help and home prices need stability. Bair's plan fits the bill, and ought to start now.

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