Just as the Obama administration prepares its plan to salvage the financial system and help homeowners facing foreclosure, the debate over whether loan modifications actually work is heating up again.
This is a policy argument in which only one thing is certain: no one involved has any idea what they are talking about. None.
A recent study by the Office of the Comptroller of the Currency says that more than half of homeowners default again within six months of having a loan modified. Housing advocates counter that loan modifications fail if they’re not structured properly, because some lenders merely offer repayment plans that only add to a homeowner’s cost.
The Washington Post wades into the debate today, but it’s been going on for months — ever since pushing loan modifications became the focus of foreclosure prevention efforts. It’s hard to say for sure who is right, mostly because loan modifications are so new there’s simply no good historical data to tell us one way or the other.
It’s not just that we don’t know whether loan mods will work or not, we’re also moving toward doing more and more of them. One financial analyst suggested to me in an interview for a TWI story last fall that the first step in any loan modification effort should be collecting detailed information on what kind of loan modifications are getting done, what exactly they involve, and how they are performing. Short of that effort, it’s going to be hard to tell whether loan modifications are the way to go.
What if lenders modify hundreds of thousands of loans, and house prices fall again, by 10 or 20 percent? That’s not an unlikely proposition. What then? Do lenders redo all those loans? Will homeowners who once again find themselves underwater on their mortgages walk away?
What has struck me in the loan modification debate has been the absence of interest or investigation into the alternative – renting. Some people aren’t going to be able to afford their homes, no matter how many loan modifications they get. Some homeowners simply won’t qualify for loan modifications in the first place. They should be renting. They would probably welcome a chance to get out from under the burden of their homes, and their ruined credit.
If lenders are going to have to take a loss on some loans, what about a “get out of jail free card” for homeowners who can’t be helped by loan modifications? Lenders want those homes out of limbo and in the hands of another buyer anyway, and prolonging the inevitable doesn’t help. Homeowners who are going to end up renting anyway could get some sort of break on their credit history, their delinquent mortgage payments wiped clean, so they could go out and find a decent rental property.
Or they could rent from the lender, if some are willing to temporarily get into the property management business, until a new buyer is found. Keep the house and the lawn up, don’t trash the property, and the lender gives you a clean slate to find a place to rent.
It’s not an ideal solution. But at the moment, there don’t seem to be any other magic bullets out there. So we cling to the idea of loan modifications, even though we have no idea whether they’ll make a difference. In the meantime, we don’t even consider alternatives.
One of the lessons of this crisis has been that the benefits of homeownership have been overblown, and that owning a home isn’t for everyone. So why, as the debate over loan modifications goes on, and the government searches for ways to stop foreclosures, are we desperately trying to keep people in homes they can’t afford, regardless of whether or not they get a break on their loans?
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