The Failure Of The Mortgage Modification Plan

The Administration’s plan to help modify millions of mortgages to keep “worthy” homeowners in their houses is not working. A Treasury Department report shows that 360,165 people had their monthly payments reduced through August. That is only a little more than 10% of the mortgageholders eligible for the program.

And, the situation is not likely to get better.

The Treasury may not want to make public comments about why the program has been such a disappointment, but the reasons are obvious.

Mortgage companies and banks have a financial incentive to alter home loans, but the pace of the modifications is a relatively clear sign that the incentives are not enough. Pushing homeowners out of their houses is, in some cases, a faster way for banks to get most of their loan balances back through property sales. Foreclosures also helps avoid the risk that homeowners will default on mortgages even after they have been modified.

Data also show that many homeowners do indeed default on modified mortgages which set lower monthly payments. Some of these homeowners do not have the income to make any monthly payments at all. Others realize that the value of their homes are much less than their mortgage values. Instead of swimming upstream in the hopes that the values of those properties improves enough so that they can sell them some day at a profit, they simply walk away.

The Administration’s program resets monthly payments, but it does not reset the total value of individual mortgages by revising them down closer to the appraised amounts of what their houses are really worth. This would require banks to take large write-offs and the government does not have a way to make the financial firms whole on those losses.

The mortgage modification plan does not work because it fails to address the key incentive to staying in a home–dropping the value of the mortgage to match the value of the home.

Douglas A. McIntyre