Modifying some of those loans

AS THE Bush administration and Congress try to untangle the fallout from the defeat of the Wall Street bailout, foreclosures continue to climb, financial companies fail, and the middle class economic squeeze worsens by the day.

One significant action doesn't need congressional approval and can make a big difference. Effective and wide-scale loan modification programs by lenders and mortgage holders can stop the freefall and begin the long way back to a sustainable economy.

Some are frustrated that Congress cannot agree on what to do. The investment banks, subprime lenders, and other creators of unduly risky investment products wait for Washington to do something. Wall Street firms and lenders, however, should ask themselves whether they have done enough to get their own act together; they need not wait to take action to help themselves, homeowners, and our economy.

At the state level, we have tried to stop the bleeding. Last year, the Legislature enacted a 90-day "right-to-cure" provision giving homeowners more time to seek loan workouts before foreclosure. Our office has worked closely with Governor Patrick to urge mortgage lenders and servicers to use that time to offer loan modifications to distressed homeowners. Because a foreclosure costs the lender tens of thousands of dollars in expenses and devalued real estate, preventing foreclosure is in everyone's best interests.

Some banks may have modified some terms in some loans, but most lenders have failed to offer loan modifications in meaningful numbers. In the last three months, lenders issued 4,721 new foreclosure notices in Massachusetts. During that time, only 144 loan modifications were filed in the Registry of Deeds. We have reviewed those 144 modified mortgages and found that virtually none reduced the monthly payment owed by the homeowner. The latest report of the Multi-State Foreclosure Prevention Group for the period January through May 2008 confirms this dismal record.

Many families struggling to hold onto their homes and savings are not looking for charity or a bailout, and that is not what loan modifications are about. Real loan modification programs by lenders, servicers, and investors are necessary to stop foreclosures, stabilize cash-flow on the mortgages owned by failing financial instruments, and help put a floor under the downward asset spiral that exacerbates the crisis in the credit markets.

The Bush administration's original plan of simply throwing $700 billion into the hole without putting a floor on the bottom would have wasted money and would not have worked. Representative Barney Frank and others in Congress have improved that proposal, and should be applauded for incorporating homeowners' interests. The proposal rejected by the US House of Representatives this week, however, did not do enough to require the scope of loan modifications necessary, and misplaced the cost of modifications on the taxpayers, rather than on the creators of the unsustainable loans.

An effective rescue package should require, as a condition of participation, that current mortgage holders and servicers rewrite delinquent loans to avoid foreclosure when the borrower's current ability to pay, although it may not satisfy the payment schedule, still provides an income stream preferable to expected losses at foreclosure. The government should not accept the transfer of toxic products from the books of financial firms to taxpayers' books without systemic loan modifications first.

Congress should also take another look at authorizing bankruptcy courts to modify distressed mortgage loans. This is a critical protection for both homeowners and taxpayers. It is an efficient mechanism to avoid foreclosures because it is tailored to the circumstances of each homeowner and overseen by a federal Bankruptcy Court.

In the end, we will have fewer bankruptcies if responsible financial companies act now to save themselves and our economy. Even if we assume that a multibillion-dollar rescue plan is necessary, there is no reason for those who created, packaged, invested in, and profited from securitized subprime loans to delay fixing their own problems. Indeed, doing so should be mandatory for those who want to participate in a taxpayer-funded rescue plan.

Martha Coakley is the attorney general of Massachusetts.