Loan Modification Programs

Yesterday, the Federal Reserve Bank of Boston released a very interesting report on how the government's Home Affordable Modification is working. The program offers lenders $1,000 for each mortgage they modify, and another $1,000 for each modified mortgage still performing after three years. The modified loan must not exceed 31% of the home owner's income.

Over 1 million homes have faced new foreclosure proceedings in the past four months, but only 350,000 borrowers have even been offered modified loans.

Here is why the Bank says the program is not working very well. First thing is that roughly 30% of the borrowers will eventually pay off their mortgages anyway, but nobody knows which loans fall in that 30% so banks are reluctant to offer modifications to anyone.

The second thing is some borrowers default on modified loans later and the declining house values make later foreclosures even more expensive for the bank. However, the Fed doesn't mention that the majority of the modified loans have higher monthly payments than before because the banks have loaded the loans with fees, late payment fines, etc. etc.

So another pie in the sky government program crashes when it comes face to face with the real world. But then the people who devise these programs are millionaires and they have no concept of meeting monthly bills and mortgage payments. What did you expect?

More really bad news. Neil Barofsky is the special inspector general for TARP (remember he called for an accounting of how the TARP money was spent and got slapped down by the Treasury Department) and I think one of the few people involved with economics in this government that you can trust.

Anyway, he released a report yesterday that says the commitments made by the U.S. government in all its various bailout programs could cost as much as $23.7 Trillion!!
(For perspective, the total U.S. government debt today is about $10 Trillion.) The Treasury Department immediately went ballistic trying to discredit him.

Yesterday, Bill O'Reilly, the buffoon of Fox News, said that he thinks the U.S. is headed for bankruptcy. When Bill O'Reilly and I agree on something, you should be afraid, very afraid!