When Mortgage Assistance Does Not Work

The federal government has a small operation called the Office of Thrift Supervision, which, among other things, keeps track of mortgage defaults. It defies common sense, but the agency says that many people who have mortgages re-worked to their financial advantage often default on their obligation anyway.

According to MarketWatch, the data show that “loans modified in the first three months of 2008 showed that 37% of borrowers were more than 30 days behind on their payment within three months, and 55% had re-defaulted within six months.” This information opens the Pandora’s Box of whether the Administration’s plan to help homeowners bring down their monthly payments will make any difference to the real estate market.

There are several reasons why helping people pay for things that they cannot afford already does not work. In the case of housing, the most compelling one is that giving people the ability to pay for a house which will never have any equity value for them simply buys them time to make payments while they find another place to live.

The other reason that mortgage modifications are a challenging way to put a floor under housing prices is that this assumes that people who cannot afford a $500 a month mortgage payment can afford a payment of only $350. But in most cases this does not matter.  As people turn away from debt and toward savings, a house is no longer a good mattress in which to store cash.  Perhaps more to the point, with joblessness on the rise and many middle class household budgets built around two people working full-time, it does not take much bad luck to undermine a perfectly compassionate program which also pretends to have the power to keep residential real estate values from dropping at a rate of nearly 20% a year as they are now.

The government wants to solve the housing crisis because experts have told them, quite correctly, that home prices are critical to the finances of a large percentage of the people in America. After a decade or more of increasing consumer confidence which was built primarily on appreciating home values, most people, even those with jobs, are broke. They have what economists call “negative net worth”, a condition which almost always leads to malaise.

There is something very telling that many people who have every chance to stay in their homes do not take that opportunity. They default to a world where they have one less financial obligation and where their burdens of responsibility are less.  People are willing to walk away from a home they could possibly afford with the new government assistance,  because the economic depression is no longer just a financial reality. It has become a state of mind.

Douglas A. McIntyre