The economists I respect keep saying that the foreclosure crisis prevents any meaningful fix to the economy. If people keep losing their homes, the death spiral that causes for various industries and unemployment is something hard to pull out of. Bill Clinton told a crowd in 2008 that every foreclosure costs $250,000 to the greater economy.

The efforts to mitigate foreclosures taken by the Administration just haven’t worked, and in fact have been counter-productive. Indeed, the HAMP – the main federal program – made it harder for lenders to reduce principal payments.

I think the Administration has finally got the message on this, and better late than never.

The Obama administration on Friday announced a $14 billion effort to try to stem a rising tide of home foreclosures by giving lenders incentives to erase some mortgage debt and slash mortgage payments for the unemployed.

The new aid programs, funded from the $50 billion allocated to housing rescue under the Treasury Department’s Troubled Asset Relief Program, will also allow borrowers to erase mortgage debt down to a maximum of 115 percent of their home’s value by refinancing through the Federal Housing Administration.

This sounds like a decent first step. The feds have done nothing for people underwater in their homes, and right now they have more incentive to walk away than stick it out. I appreciate the 3-6 months assistance for homeowners who are unemployed, too.

This follows on to plans by Bank of America to cut principal payments as well. It’s like everyone’s finally understanding that foreclosures help neither banks or the economy as a whole. And as an interesting postscript to this, check out who is credited for snapping the banksters into shape on this:

The principal reduction plan would be administered under HAMP and is modeled after a principal reduction plan announced this week by Bank of America.

Under pressure from Massachusetts Attorney General Martha Coakley, Bank of America Corp said on Wednesday it would offer what could be up to $3 billion in loan forgiveness to about 45,000 troubled homeowners.

If she only were as good a candidate as she appears to be an Attorney General, we could have saved a lot of heartache this year.

UPDATE: Some positive response from Andrew Jakabovics at CAP. I talked with him about this two or three years ago, I think, and he was pushing this kind of response. This is a good step.

In what is essentially a modern version of the New Deal’s Home Owners’ Loan Corporation, a borrower who is current on her loan but who owes more on her home than it is currently worth can refinance into an FHA loan for 97 percent of the property’s current value. Incentives will be paid to servicers to allow these borrowers to refinance for less than the outstanding amount. Given the much larger losses lienholders would face if borrowers defaulted, cash in hand may be sufficiently attractive to allow these short-refis to proceed.

David Dayen

David Dayen