The problem with loan modifications
Thus far, the Obama administration has aimed most of its housing policies at helping people keep the homes they currently own. But some think that's a bad idea, and we need to encourage people to get out of homes they can't actually afford. Peter Goodman explains the thinking:
[D]esperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.
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.
Foreclosure often feels worse, but for families trapped in a home they can't afford, it's probably quite a bit better. But it's hard to say whether any of this much matters. As the graphic atop the post shows, the programs are extremely small given the size of the foreclosure problem. Economist Mark Zandi, for one, wants the government to attack the root of the problem. Loan modifications typically knock down the interest on loan payments. But the bigger issue is folks who now owe more than their home is worth. Turns out that's an even stronger predictor of foreclosure than unemployment.
Zandi wants to see the government modify mortgages, not interest payments. He'd like "the Treasury Department [to] push banks to write down some loan balances by reimbursing the companies for their losses." In other words, the government would pay banks to write down the cost of the loans themselves. The word "some" is doing a lot of lifting in that sentence, so I'd like to see a fuller proposal -- how many mortgages would benefit, and how much would banks write down? -- but it's nevertheless the case that the Obama administration has done a whole lot more for the banks that own the mortgages than the people who are paying them. That said, I doubt the politics are very good for paying off banks that made bad loans, even if the ultimate beneficiaries are the people trapped in the mortgages.
Graphic credit: New York Times
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