12/13/2008 05:12 am ET Updated May 25, 2011

Fannie and Freddie Offer Thin Lifeline to Homeowners

Think of it this way. The American homeowner is underwater and drowning, and Fannie and Freddie have just thrown in a spool of thread to pull them out.

At a time when it is increasingly obvious that the foreclosure crisis is poised to take down the entire economy, the feds are still relying on the same dithering, ass-covering coalition of mortgage lenders, investors and servicers -- the HOPE Now Alliance -- to advise them on how to address the foreclosure crisis. Fannie and Freddie announced on Tuesday that they came up with a "streamlined" approach to loan modifications that would be available to borrowers who have missed three payments in a row. It would reduce the amount they pay every month to, at most, 38% of their gross monthly income, through methods like (temporary) rate reductions.

Of course, 38% is still a hell of a lot, depending on how much money you make. Of course the plan would be voluntary. Of course it would only apply to mortgages Fannie/Freddie guarantee or own. Of course, perhaps most importantly, the plan doesn't begin to address what to do with the majority of subprime mortgages that are much more difficult to modify because they have been bundled up and sold to the four winds as mortgage backed securities. Some hedge funds have already begun to threaten lawsuits if their precious, failing mortgages are unduly tampered with.

The most important Fed voice of reason in the foreclosure prevention debate has been FDIC chair Sheila Bair, who was quick to dis the plan as not going "far enough."

Joe Nocera of the New York Times put it best:

The situations borders on the absurd. Investors will not allow mortgage modifications that would hurt them more than some other investors -- thereby insuring that everyone gets hurt even more as foreclosures continue. And as foreclosures continue, the financial crisis continues to deepen because foreclosures on Main Street mean billion-dollar write-offs on Wall Street. And struggling homeowners can only pray that their mortgage is still held by the bank and not sold to Wall Street -- in which case they are out of luck. It is like flipping a coin to see if you can hold onto your home.

Tails. We all lose.

(This post, and my other writing on this topic, are available at DMI blog.)