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Monday, January 4, 2010

Making Home Affordable Now Officially a Disaster

I say that because even the New York Times has noticed.

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good.

Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes.

As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

Now, if you're a long time reader of this site, you know that the New York Times is largely echoing things I've been predicting for more than a year. Before I give myself too big a tap on the shoulder, let's remember that I predicted all sorts of calamities for mass loan modification. Given that I predicted everything, I couldn't help but be right.

This was a disaster from the start and I was talking about the corossive nature of loan modifications even before President Obama made them policy, in fact even before there was a President Obama.

The first problem is that as recently as 2007 almost no one had heard of loan modifications. Then, President Obama wanted several million done in 2009. That's just not how things work. The main problem is that they're fraught with moral hazards. If you're behind on your mortgage, you're rewarded with a new loan with a rate as low as 2%. You can see where everyone would want that deal. As it turns out, banks were wise to this problem and that's one of the main reasons that so few have been done. They're desperate to avoid the flock from asking for this deal.

It's created the perfect storm of a program that was supposed to be a savior but it has turned into a total waste.

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