Lending a hand

Although the sub-prime mortgage meltdown has been years in the making, unmistakable signs of trouble emerged last year when the housing market first started to dip. Nevertheless, a new report found that sub-prime mortgages issued in the first half of 2007 defaulted at even faster rates than those issued in 2005 and 2006, when risky lending practices were still in vogue. That’s because lenders didn’t tighten the criteria used to gauge a borrower’s ability to make his or her payments.

The report by investment banker FBR Investment Management is the best evidence yet of the flaw that eventually shook the entire credit market: Too many companies cared only about cranking out new loans, not about borrowers’ ability to repay them. That’s especially problematic for sub-prime borrowers whose income and credit histories put them at greater risk of default.

There’s no need to shed tears for reckless lenders or borrowers. But policymakers should still try to find ways to cushion the blow faced by inexperienced home buyers and the economy as a whole. Treasury Secretary Henry M. Paulson Jr. predicted Tuesday that more than 1 million homes would go into foreclosure this year, including 620,000 bought with sub-prime loans. And with the interest rates on 2 million sub-prime loans due to jump in the next 18 months, the picture is likely to stay grim for awhile.

Paulson has outlined several steps that could help ease the pain in the housing market. Among them: improved disclosure of mortgage costs, a better system for supervising brokers and tougher rules against predatory lending. He’s on the right track. Mortgage lenders and brokers are subject to a patchwork of federal and state rules, enforced by different sets of regulators. Instead, there should be national standards that set minimum requirements to protect borrowers, lenders and investors against future meltdowns.

In particular, borrowers should be given simple and clear information on what their monthly payments will be -- and how those payments may change as the loan matures. Brokers and lenders should be free to offer a wide range of products but should face penalties if they steer customers into mortgages that they can’t reasonably be expected to afford. And the companies that collect mortgage payments should be obliged to help troubled borrowers search for ways to avoid foreclosure. With mortgages being handed off so quickly from lenders to investors, it’s hard for troubled borrowers to know whom to call.