Federal action and the housing crisis
How the $75 billion government bailout for troubled homeowners may be making the housing crisis worse.
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Fifteen million Americans are "underwater," meaning they owe more on their mortgages than their homes are worth. The Obama Administration has $75 billion for a year-old program called Making Home Affordable, but there's widespread agreement that it's a failure that could be making things worse.
Critics say false expectations have led people to waste money trying to stay in homes they really just can't afford. And banks have been hiding their losses.
The Making Home Affordable program provides incentives to banks to lower mortgage payments for troubled homeowners. The program hasn't been successful, says Peter Goodman, National Economic Correspondent at the "New York Times."
"For some banks it's been attractive; for most banks it hasn't been attractive enough to persuade them to move very aggressively -- because the Treasury has pressured the mortgage companies to move faster. We've got about 750,000 loan modifications on a trial basis, lasting between three and five months; but only 31,000 permanent ones."
Marlene is a California homeowner who has seen the value of her home decrease by close to $200,000. At the same time, her husband's income had also decreased due to the tough economy.
After months of frustration working through the application process with their bank servicer, Marlene was able to get into the loan modification program.
"We got to the point at the end of August with the bank being unresponsive where we thought, you know what, they don't care; we're just going to miss a payment and maybe they'll come to us," said Marlene. "So we missed a payment in September, realizing we would be damaged, but maybe this is the only way the bank would look at us ... and sure enough, the bank came to us and all of a sudden, doors started opening up."
Mark Zandi, Chief Economist at Moodys Economy.com says millions of homeowners are going through what Marlene went through, and bank servicers aren't equipped to deal with the numbers.
"Fundamentally, I think the entire system is being overwhelmed," said Zandi. "You have millions of people with so many difficult problems it's very difficult for the servicers to work through them all."
Also, since loan modifications aren't a long-term business for the servicers, they're less willing to invest in improving the systems and processes that support this area.
"The other real key problem is you do have homeowners who are deeply under water," Zandi continued. "And if you simply modify their loan my lowering their monthly mortgage payment -- by the way, you're only doing this temporarily; the maximum period in which you can lower the monthly payment with this modification is five years -- even if you do that, many of these homeowners are still exhibiting risks of re-defaulting."
This is because they still can't afford the house, says Zandi. "I think it's very likely that we will see many more properties go into foreclosure sale this spring and into this summer."
Zandi believes the loan modification program should be expanded, and that tax payers should shoulder the burden of funding the program. Why? Because, Zandi says, if we don't and the economy slides back into recession, the cost to taxpayers would be immeasurably greater.
Kent Smetters, Professor of Insurance and Risk Management at the University of Pennsylvania's Wharton School of Business, disagrees.
"The argument strikes me as fundamentally scary and problematic," said Smetters. "To say that taxpayers are responsible for a person who's making $50,000 a year and took out a $600,000 mortgage."
Smetters says homeowners who signed up for mortgages they couldn't afford were making a bet that home prices would continue to increase, and that taxpayers shouldn't be responsible for what is essentially, "gambling."
"At some point, we have to make the decision that we want to have a train wreck," said Smetters. "I mean, no one wants to talk about that, but the fact of the matter is you've got to get the people out of houses they can't afford. And the advantage of having a train wreck is that you clear the tracks quickly, instead of still have a train wreck but just have it go slowly and stretched out over a decade."
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