Oct. 25 (Bloomberg) -- When Kansas City Federal Reserve Chairman Tom Hoenig announced at the bank's annual conference in Jackson Hole, Wyoming, last month that someone else would read former Fed Governor Edward ``Ned'' Gramlich's speech on the subprime crisis, few failed to grasp the sorrowful significance.

Having raced to both finish a book on the subprime mess in July and to write those luncheon remarks, Gramlich succumbed to leukemia five days later.

David Wilcox, the Fed economist who read the speech, noted that Gramlich wasn't shy about recognizing that his sound recommendations and timely work might live beyond his untimely death.

One of his compelling recommendations was a major push to fund non-profit housing groups that employ face-to-face counseling and subprime shuttle-diplomacy. Gramlich noted that, when called upon, these groups have been successful in averting some two-thirds of potential foreclosures.

Helping homeowners by offering appropriate assistance to avoid foreclosure is hardly a bailout.

First, it can only work if distressed homeowners have both the ability and willingness to meet revised mortgage payments when onerous conditions or steep interest rate-hikes have been relieved. The longer we wait to help replace interest-only and other exotic mortgages for hard-pressed borrowers with sounder, long-term fixed rates the worse the potential fallout from the current crises.

Second, unnecessary foreclosures can lead to serious collateral damage to the economy and other homeowners.

Foreclosure's Costs

The Joint Economic Committee of Congress estimated that each foreclosure costs a local community $227,000 when surrounding property values are included. Dan Immergluck and Geoff Smith of the Woodstock Institute, a policy research group in Chicago, figured that in 1999, each foreclosure caused nearby single-family homes in the city to decline in value by 1.44 percent for dwellings in low and moderate-income census tracts.

Yet, according to Ana Moreno of the Family Housing Fund, the costs of preventing a foreclosure -- through counseling and financial assistance -- is just $3,300 per home. Chicago estimated that its $4.8 million investment in the Chicago Home Ownership Preservation Initiative (HOPI) from fiscal 2004 to 2006 saved a total of $287 million in property values, lender losses and police and security spending. Meanwhile, 1,304 families avoided foreclosure and 330 vacant and neglected buildings were reclaimed for affordable homeownership.

Such a successful low-cost intervention would seem to be low-hanging fruit.

Bush Veto Threat

While several leading Democrats called for bold responses last spring and $200 million this fall, and Treasury Secretary Hank Paulson recently announced an initiative to connect mortgage servicers that collect and process loan payments to foreclosure counselors, little has happened. Moody's recently estimated that only 1 percent of riskier mortgages have been restructured to avoid foreclosure.

President George W. Bush requested only $50 million for housing counseling, and recently threatened to veto a Senate transportation appropriations bill that would have contributed $100 million for foreclosure counseling.

On top of taking steps to head off mass foreclosures, we need to address what Gramlich called the ``giant supervisory hole'' in the subprime market. As Gramlich noted, 52 percent of subprime mortgages are originated by companies with no federal supervision. What supervision there is consists of a patchwork of state regulation that Morris M. Kleiner of the University of Minnesota and Richard M. Todd of the Minneapolis Fed described as ``poorly enforced'' by regulatory agencies that ``are sparsely staffed.''

Oversight Holes

Translation: there is little to stop shoddy mortgage lenders from setting up shop where they want.

While the issue of how to fill the holes in the Swiss- cheese regulatory structure for subprime mortgages may be less clear, in casual conversations at the Fed conference it was hard to find anyone that didn't think more regulation was needed.

Proposals abound.

Democratic Senator Chuck Schumer, of New York, has called for mortgage brokers -- including those now supervised by states -- to be subject to federal supervision on lending and underwriting standards. Earlier this week, House Financial Services Chairman Barney Frank, a Massachusetts Democrat, introduced legislation calling for sweeping reform of federal and state oversight. Representative Spencer Bachus, Republican of Alabama, wants to require state regulators to enforce minimum disclosure and lending standards.

Sense of Urgency

Paulson also has embraced increased regulation and last week called for ``a nationwide monitoring system that covers all mortgage originators.''

What seems most important is that some state-federal mix fills the existing holes. The Fed has started a pilot program that promotes cooperation between federal regulators and the Conference of State Bank Supervisors. This program is promising, though a greater sense of urgency in moving beyond a pilot stage would be reassuring.

When Chicago Mayor Richard M. Daley sought to address foreclosure problems in Chicago a few years ago, he encouraged at-risk homeowners to call a toll-free number right away while using the slogan, ``Every Minute Counts.'' The White House might want to borrow that sense of urgency when it comes to forging bipartisan action. It's unfortunate that Ned Gramlich isn't around to help that process, but at least he left a roadmap.

To contact the writer of this column: Gene Sperling in Washington at gsperling@cfr.org.

Last Updated: October 25, 2007 00:08 EDT