Collapsing US house prices are the epicentre of the global crisis. They have destroyed banks' balance sheets, causing first a credit crisis and then a worldwide collapse in demand. As people lose their jobs and incomes, even those who made prudent decisions a few years ago are finding it difficult to hold on to their homes. Record low mortgage rates, supported by the Federal Reserve's extraordinarily lax monetary policy, should help keep people in their homes by reducing their debt burdens. But with US housing prices down more than 25 per cent from their peak, many find themselves saddled with mortgages worth more than their houses.
The anti-foreclosure plan boosts Fannie Mae and Freddie Mac's capital by $200bn and allows them to re- finance loans of up to 105 per cent of the house value, above the usual 80 per cent, so more owners can benefit from low mortgage rates. It also offers $75bn worth of incentives to modify loan terms that claim too much of borrowers' incomes – and allows bankruptcy courts to restructure mortgages should incentives prove not big enough to work.
This is all good, economically and politically. Foreclosures come in self-reinforcing spirals – repossessed homes sold on the cheap push down the value of other houses – which government should try to brake. Some worry that this rewards reckless behaviour. But the plan is well targeted: the administration aims to contain the fallout, not to keep everyone in their home. The plan helps only those with a reasonable chance to retain their house.