Mortgage modifications have done more harm than good

I argued in a prior post that the best way to deal with a deflating bubble was not to try to reflate that bubble. Instead of letting the real estate market reach equilibrium by letting prices fall to the point where the market clears and letting people who cannot afford their housing move to cheaper rentals, it has tried to keep homeowners in place through a combination of policies: mortgage modifications, subsidized low mortgage rates and tax credits.

The net impact seems that at great cost it has prolonged the agony for existing homeowners who tend to default at a later date anyway and who would have been better off cutting their losses and moving into rentals they could afford.

Not only has it been detrimental to existing homeowners, but it’s also unfair to those who have been wisely renting for many years and are not getting the benefits of lower prices as the market is not being allowed to clear. It’s all the more unfair as many of those people will be bearing a disproportionate share of the bailout burden as they will be taxed to pay for the follies of others.

There is a great article in the NY Times analyzing the early results from the program. Read it at:
http://www.nytimes.com/2010/01/02/business/economy/02modify.html?hp

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  • I agree. Politics isn't about economic fairness- in this case other goals of "softening the landing" and "reassuring investors that they aren't immediately screwed" come into play. But yes, the program could hardly fairly compensate for decades of shortsighted ownership subsidies, shortsighted mortgage lenders, and the vast numbers of purchasers who lacked the information to make responsible financial decisions. Hopefully there will be a political opportunity to fairly and comprehensively reform the economic options for the middle class. (Elizabeth Warren's analysis is responsible: http://www.newyorker.com/online/blogs/jamessurowiecki/2009/11/video-elizabeth-warren.html) Whether the US government is capable of addressing these issues responsibly is another question: the filibuster makes our legislative process slow and anti-democratic. Fine when stability is a good thing, but not great when you're trying to turn things around.

  • I agree with you about this. The entire recovery, both in the housing market, and general economy, seems to require a large and false level of growth. The administration projections for growth that are required to keep the deficit from escalating, and leading to potential inflation or even default are only doable with an unrealistic sense of wealth that keeps people borrowing at unreasonable levels. Part of the psychology seems to be keeping the ownership society intact. Nowhere is that more clear than in the amount of people who own homes rather than rent. So it is the false sense of wealth, and the unfairness to the responsible that both occur.