Are Loan Modifications Evil?


We all know that there are plenty of problems with authorizing bankruptcy courts to make loan modifications to mortgages. It’s favoured by Sheila Bair as a way of keeping people in their homes and–fingers crossed–perhaps reducing the costs across the economy and financial sector from mass foreclosures. As we’ve pointed out, however, the adjustments will have widespread secondary effects, making otherwise good mortgage backed securities riskier, encouraging bankruptcy and making future mortgages more difficult to obtain.

In the Wall Street Journal a coupled of days ago, former mortgage consultant Ramsey Su argued that the loan modifications will also prevent the market processes from taking homes out of weak hands and putting them in stronger hands. This is a danger in every bailout actually, keeping resources locked up with current owners and management rather than making them available to those who could better afford them. Using bailouts for bonus bucks to retain employees in failing firms, for instance.

But with housing there’s an added problem, according to Su. It’s actually evil, making people slaves to unaffordable mortgages rather than letting them exit home ownership in favour of renting.

Here’s how Wu concludes his essay:

Finally, loan modification is not only ineffective, it is evil. Coercing borrowers to continue paying a mortgage on a home that is hopelessly overvalued and not informing them of alternatives is predatory lending.

The media should interview those who had been foreclosed upon. Do they feel sorry or relieved? Are they rebuilding their credit, not to mention their lives? Do they miss the pressure of having to make payments they cannot afford on a McMansion that belongs to the lender?

The intent of modification programs to date is to create a generation of mortgage slaves. Fortunately, mortgage slaves can free themselves via foreclosure, and the masses are choosing to do so.