It is time to revisit a topic we have been looking in on every few months for the past year. I am referring to the government’s program to help people stay in their homes through modifying the terms of their mortgage.
When the program was first announced to great fanfare in March, I observed that nobody outside the Treasury seemed to think it would work. Only two months later I had a little fun pointing out how, even by then, it was pretty obvious it was going to miss its unrealistic goals by at least an order of magnitude. By July I was writing about the inevitable finger-pointing that followed the revelation that a program nobody believed in was not, in fact, working very well.
Of course, the Home Affordable Modification Program is still running, and still bravely defended by administration officials with a straight face. And they sure are brave. Last week The New York Times told us that U.S. Mortgage Plan Aided 7 Percent of Borrowers. That figure, apparently, refers to 7 percent of the 853,696 borrowers enrolled in the program, not 7 percent of all borrowers.
That sounds bad enough, but then on Wednesday the Wall Street Journal ran an opinion piece by the CEO of ING Direct USA that put the success rate at only 1%. (His calculation is the number of completed permanent modifications divided by the estimated number of eligible borrowers.)
All of this is fairly predictable, and was indeed widely predicted here and elsewhere. Despite periodic promises from the administration to pick up the pace and/or threaten mortgage servicers with unspecified punishments if they didn’t make it work, the program has been limping along like this since day one.
What is a relatively new development is the dawning realization in certain circles that maybe the whole thing was a bad idea to begin with. Not just that the mechanics of the program were poorly thought through. (Which is true.) Nor that it was founded on the flawed premise that most homeowners facing foreclosure could very nearly afford their houses and just needed a tweak to their mortgage terms. (Also true.)
The new revelation for the Yes We Can Crowd is that maybe the goal of the program was misconceived. Saving a home from foreclosure may be a good thing for the family that gets to live in it (and even then, depending on the terms, maybe not) but it might not be good public policy. It is just possible that this particular corner of the free market wasn’t all that broken after all.
The very lightly read January 1 edition of the Times carried the item U.S. Loan Effort Is Seen as Adding to Housing Woes. Permit me to quote liberally:
Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes.
As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.
Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.
Behind the scenes, Treasury officials appear to have concluded that growing numbers of delinquent borrowers simply lack enough income to afford their homes and must be eased out.
In late November, with scant public disclosure, the Treasury Department started the Foreclosure Alternatives Program, through which it will encourage arrangements that result in distressed borrowers surrendering their homes. The program will pay incentives to mortgage companies that allow homeowners to sell properties for less than they owe on their mortgages — short sales, in real estate parlance. The government will also pay incentives to mortgage companies that allow delinquent borrowers to hand over their deeds in lieu of foreclosing.
I’m the sort of guy that thinks the free market mostly works and requires government intervention only in exceptional cases. So I have little sympathy with Obamaites who tend to the opposite assumption, that the free market generally does not work and usually needs government intervention.
Yes, hindsight is 20/20 and tragic flaws are rarely as obvious in real time as they are after things go awry. But seriously folks, this particular tragic flaw isn’t all that subtle.
And it is not as if the goal of the program went unquestioned at the start. For example, see the March 9th post What’s So Bad About Foreclosure? at All Financial Matters.
The core problem is that the people who thought HAMP (or something like it) would be a good idea were blinded by their own ideology. They could only see consumers as well meaning, responsible, and thoughtful, if a bit naive. Businesses, on the other hand, were greedy, incompetent, and cloddishly destructive in their efforts to make more money. So, of course, what was wrong here was that the corporations tricked the wholesome consumers into mortgages they couldn’t, quite, afford. If only the mortgage companies could be cajoled into being a touch more reasonable everybody would be better off. Problem solved.
Alas, it turns out that it was not the mortgage that was unaffordable, it was the house. It is a bitter pill to swallow, but the best way, perhaps ultimately the only way, to make home more affordable for some is to get them into less expensive houses.