Government Loan Modification Program – Delaying the Inevitable?

An interesting and thought provoking article in the New York Times about the mortgage modification program that the government has been pushing as their “remedy” to the housing problems.    A couple of main points:

• It has failed to provide permanent relief for struggling homeowners and has therefore raised false hopes and encouraged people to avoid making the difficult decisions that they should be making.
• By delaying people from making the difficult decisions, the government is prolonging the housing market’s necessary adjustment and working through the pricing adjustments needed to get back to the point at which incomes and house prices are in line.
• With the unemployment situation as it is (I think it’s over 7 million jobs lost since this all started?) there are a lot of people who are in homes that they can’t afford any more.   The sooner we, as an entire housing and mortgage industry, can adjust to that fact, the more quickly we can return to health.

I think there are two things that this article doesn’t take into consideration:

• One of the main reasons that the modifications aren’t working well is because they aren’t substantial enough to get to the point of people actually being able to afford to keep their house.    Whether your interest rate is 2% or 8%, if you don’t have enough income to make the payments, it’s not going to matter.    It’s called principal reductions.   Without principal reductions, the loan modifications aren’t going to work.
• The “justification” of giving breaks to some people when they are struggling but not others?   According to the last statistics that I saw, 85% of the loans that Fannie Mae and Freddie Mac have are making their payments on time.   So how do you mesh those two statements?    How do you mesh the problems with those who don’t have problems?

Tom Vanderwell

Mortgage Modifications Are Seen as Adding to Housing Woes – NYTimes.com

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good………

Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes…….

Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

The Treasury Department publicly maintains that its program is on track. “The program is meeting its intended goal of providing immediate relief to homeowners across the country,” a department spokeswoman, Meg Reilly, wrote in an e-mail message.

But behind the scenes, Treasury officials appear to have concluded that growing numbers of delinquent borrowers simply lack enough income to afford their homes and must be eased out.