More Signs The Government Mortgage Recovery Plan Is Flawed

The plan to keep people in their homes when they cannot make their current monthly mortgage payments has run into a raft of problems. The most obvious is that homeowners with underwater mortgages will often abandon their houses, even if the costs to stay in them are lowered. Many people are willing to turn their backs on residences on which they will probably never make any money.

Another problem which can be seen in recent foreclosure and delinquency numbers is that even owners with lowered monthly payments tend to lapse back into old habits and many eventually default.

Meanwhile, the Independent Mortgage Servicers Coalition, which represents a number of subprime lenders, said that the costs of resetting home loans is too high. According to Reuters the expenses of overhauling mortgages is prohibitively high. The news service reports “implementing the program means giving delinquent homeowners more time fix their loans, which to services will the boost costs of extending payments to investors as contractually promised.”

While the theory that the Administration has advocated, which is that giving people a break on monthly housing costs will keep them in their homes, appears to work on paper, its practical drawbacks are overwhelming. Lenders do not have appropriate financial incentives to vigorously participate in the programs. Borrowers still live in homes which have deteriorated so much in value that they will have to pay banks part of the principals on their loans when they sell them.

Unless the Administration and Congress want to expand the mortgage assistance program so that home loan balances are brought down based on updated appraisals, the plan will continue to be deeply flawed. Banks will not want to take write-offs on these adjustments, so the federal government will have to make up the difference to keep the capital bases of the financial firms involved whole.

The mortgage recovery plan is a bust. That means home prices will stay under pressure as those who can barely make home loan payments continue to hire movers and get out of town.

Douglas A. McIntyre