The Special Inspector General for the Troubled Asset Relief Program thinks that the Administration made a wrong turn on its path to help struggling American homeowners. Neil Barofsky said of the Home Affordable Modification Program that “Treasury should consider changes to better maximize its effectiveness,” according to Reuters.
A very modest number of homeowners, 168,708, have received the benefits of the mortgage relief plan which set aside $75 billion for its task. And, many of the people given those benefits have defaulted on their loans anyway based on reports from the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
Barofsky objects to loan modification programs that force banks to cut the value of indebtedness on homes worth less than their mortgages. He finds that the results of these plans are uneven and only benefit some people who need home loan aid. Barofsky supports plans to suspend the mortgage payments that allow the unemployed to keep their homes beyond the six months currently proposed.
In fact, nothing that the federal government has done has helped stave off the progressive increase in defaults and foreclosures. RealtyTrac reported that foreclosures hit another high. Unemployment continues to take a toll on the housing market. In addition, many people who are among the 11 million Americans with underwater mortgages are still turning their keys back to their banks as they despair that their houses will never be worth more than their home loans.
Some economists have suggested that the government suspend housing aid completely. They believe that a swift drop in home prices to their “natural” lows will bring buyers back into the market to seek bargains which have not been available in current dollars for decades.The adjustment would be painful, but the housing bubble boil would finally be lanced and the deleveraging of the mortgage market complete.
The Administration knows that letting the housing market fall like a knife would ruin the financial prospects of millions of American families who at least have the hope that their homes will have some value, if only they wait long enough. A precipitous fall in home prices would take that hope away, even if its is only an illusory one. Consumer spending would be hit by any huge drop in housing prices. Any belief that people have of a home being a source of retirement savings would collapse. Putting away money for the Golden Years would become the order of the day.
The government’s programs to protect homeowners is part an effort to protect home prices. It may be an inefficient way to spend tens of billions of dollars, but one benefit will occur: millions of people will lose the incentives to walk away from their homes without looking back.
Douglas A. McIntyre
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