Obama needs bolder mortgage-crisis plan

America’s homeowners still wonder why they weren’t considered too big to fail when the recession was ravaging the economy. While two presidential administrations made sure the big banks got bailout money, they were reluctant to put cash directly into the hands of delinquent mortgage payers facing foreclosure.

Washington’s timidity was encouraged by the public’s amens to politically inspired rhetoric suggesting it would be a sin for government to rescue people who should have known better than to buy homes they couldn’t afford.

But many former occupants of that amen corner likely see the situation much differently now, as they view all the vacated, weed-surrounded foreclosed houses in their neighborhoods, which have reduced their homes’ market value.

In such a setting, President Obama announced Monday outside a Las Vegas home that he was retooling an underachieving effort to refinance mortgages. The Home Affordable Refinance Program was expected to help five million borrowers when it began in 2009, but has reached fewer than 900,000.

Obama is loosening the program’s eligibility rules. A cap is being removed on how much an applicant’s home may be “underwater,” referring to the difference between the market value of a house and how much is owed. Refinancing fees will also be cut.

But HARP will be available only for mortgages taken out more than two years ago and guaranteed by Fannie Mae and Freddie Mac. Applicants’ mortgages must be up to date and they cannot have made a late payment in the past 12 months.

Only a fraction of the estimated 11 million borrowers with underwater homes are likely to qualify under these rules. And while refinancing should cut participants’ monthly payments by  $26 to $200, that could be offset by the refinancing fees banks will still be allowed to charge.

Treasury Secretary Timothy Geithner has never been a fan of direct homeowner aid as the best tool to get out of the mortgage crisis, preferring instead to bolster banks so they would be more willing to extend credit to consumers. But much more dramatic steps than Obama’s retooling of the HARP program are needed.

Reducing the principal owed by homeowners facing foreclosure might yield better results. The Washington Post reported that federal programs have reduced only a tenth of 1 percent of the debt of borrowers who owe more than their homes are now worth.

Reducing their principal would not only allow homeowners to refinance. They also might spend more money otherwise to boost the economy. Give consumers the cash; they won’t sit on it like the banks.