Loan Modification

Fed study: Obama mortgage plan should give money to borrowers, not banks

By Constantine von Hoffman

A study by the Boston Fed has found that the administration?s mortgage rescue plan has failed to provide that all important profit incentive. According to today?s Boston Globe:

Mortgage lenders don?t try to rework most home loans held by borrowers facing foreclosure because it would probably mean losing money.

The Boston Fed?s findings suggest the Obama administration?s major effort to solve the foreclosure crisis by giving the lending industry $75 billion to rewrite delinquent loans to more affordable levels is not likely to work.

One of the study?s coauthors, Boston Fed senior economist Paul S. Willen, said the government would be better off giving the money directly to struggling borrowers to help them with their payments, rather than to lenders that are averse to working out the troubled loans.

?Loan modification is not profitable for lenders,? Willen said. ?If it were profitable, they would go out and hire staff.?

Hard to argue with that logic.

Writing at the WSJ, Stan Liebowitz makes a strong case for the idea that now is exactly not the time for the government to be stepping in and fiddling with the markets.

What is really behind the mushrooming rate of mortgage foreclosures since 2007? The evidence from a huge national database containing millions of individual loans strongly suggests that the single most important factor is whether the homeowner has negative equity in a house — that is, the balance of the mortgage is greater than the value of the house. This means that most government policies being discussed to remedy woes in the housing market are misdirected.

The difference in policy implications is enormous: A significant reduction in foreclosures will happen when and only when housing prices stop falling and unemployment stops rising.

(Hat tip to the HousingDoom blog)

Leibowitz is hardly a laissez faire type. He just thinks that the economy would be best served by having government do what it should have been doing all along: Requiring, monitoring and enforcing strong underwriter standards.

We are at a crossroads where we can undo the damage to the housing market by strengthening underwriting standards in a reasonable way. But to do so political leaders must face up to the actual causes of the mortgage crisis, not fictitious causes that fit political agendas and election strategies.

Yeah, I?m not holding my breath on that one.

Constantine von Hoffman is a veteran business journalist and social media consultant. He write the blog CollateralDamage, a satirical look at marketing and business.

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1. New Fed plan will help with 2nd mortgages, home equity loans
2. Bail out plan to help just 13% of borrowers in trouble
3. Mortgage Refinancing For Underwater Borrowers Now Available

Full post as published by Blown Mortgage on July 07, 2009 (boomark / email).