There are two problems with Obama’s attempts to stave off foreclosures through mortgage modifications.
First, the program is a drop in the bucket (at best, a couple of million mortgages will be modified out of tens of millions that are underwater). Second, even homeowners whose payments are reduced usually go on to default.
Because they can’t afford ANY payment, not even a smaller one. And also because many homeowners see no reason to keep making payments on houses when they owe more on the house than its worth.
John Mauldin relays the following from Diana Olick at CNBC:
“Yesterday Fitch ratings estimated that up to 75 per cent of the modifications now being done through the administration’s Making Home Affordable program will re-default in six months to a year. I’m not talking about the old modifications, which were largely repayment plans that could actually raise monthly payments. I’m talking about the new mods, which lower monthly payments to 31 per cent of a person’s income. I couldn’t understand Fitch’s reasoning, so I called them.
“Diane Pendley, managing director at Fitch, said the problem is not on that “front-end” ratio, but on the back end, which is all of the borrowers other debt (credit cards, car loans, student loans, etc.). She said that in talking with servicers, she’s hearing other debt is so high that most of today’s troubled borrowers cannot afford any loan payment at all, even at a very modest debt-to-income ratio. ‘Just getting the house payment done doesn’t mean their lifestyle is sustainable,’ she said.
“Another problem is that with home prices continuing to fall, more and more borrowers, who are essentially just renting their mortgages now because they will never see any home equity, are walking away. Even if the mortgage payment is low, the property taxes and home maintenance costs are padding that payment, and without an upside to the investment, there’s simply no reason to pay. Suffice it to say, the foreclosure crisis, on the high and low ends, is not getting any better.”
The quickest fix to the housing market is not stopping foreclosures or trying to stop the fall in prices. (That’s just kicking the can down the road). It’s allowing prices to fall to a level at which the market will clear and then making it as easy as possible for those who can’t afford their houses to move into housing they can afford.
This is actually happening in Phoenix, as investors are buying up foreclosed houses at auction and then renting them to their former owners.