The Washington Post has talked to some economists who have confirmed what many analysts already believed. Banks are often better off allowing homes to go into foreclosure than they are modifying loans. The Administration would like as many loans as possible changed to bring down monthly payments so that people can stay in their houses. Banks don’t appear to be getting the incentives that they need to slow the rate at which homeowners are evicted.
The analysis done by the Post only points to a part of the problems which, in its opinion, are that some people cannot make payments even when loans are modified and others can make payments without changes in their mortgages even if it requires pain and suffering to cover the monthly note. Banks want no part of changing loans for either of these groups.
A more important consideration is that home values are still falling, and in most markets they are still falling fast. Home sales may be moving up a bit, but most of that improvement is fueled by the drop in prices.
People who own homes but have no chance of ever making money on them have very little incentive to keep up mortgage payments even if those payments are reduced. Principal amounts are not altered under the federal program to help homeowners. That means millions of mortgages will remain “underwater”. A home worth less than the value of the mortgage on it is often a home not worth staying in, at least from any economic standpoint.
The only solution to these problems is to drop the principal amount on loans likely to go into default. This will cause banks to take write-offs and the government will need to cover those to give financial firms an incentive to go along with the process.
Homeowners don’t want to stay in homes in which, if they ever sell them will require them to write a large check to their banks to complete the transaction.
Douglas A. McIntyre
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