No kidding. Lower payments are more affordable

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Every once in awhile -- and by every once in awhile I mean daily -- you come across a study that is so obvious in its conclusions that it's actually appalling that it made headlines.

Friday's Wall Street Journal headlines says it all(subscription required): "Cutting financially troubled borrowers' monthly mortgage payments by more than 10% reduces the chances that they will fall behind again after their loan is modified, a study found."

Wait. Do you mean to tell me that spending $1,800 per month is more affordable than spending $2,000 per month? What's next? Are you going to try to tell me that having money in savings can make retirement more comfortable?

The headline comes from a study released on Friday by the Office of the Comptroller of the Currency and the Office of Thrift Supervision. It explores the effectiveness of Obama's plan to help avert foreclosures by working with lenders to reduce mortgage payments for troubled borrowers to no more than 31% of income. Critics have charged that most loan workouts end up back in default a few months later.

The real problem with these loan modification plans is that they don't take into account the central problem: People owe more on their homes than their homes are worth. You can toggle with the interest rates and loan terms all you want but the fact is that staying in a home you're upside down on is a bad deal for consumers. Families struggling with mortgages need to be saving for retirement and putting together emergency funds, not working on solutions to let them stay in something they must pour thousands of dollars into even though they owe much more than it's worth.

It just doesn't make any sense. These loan modifications are often just a bailout for lenders, allowing them to avoid taking the losses that would come with a foreclosure or short sale. Instead the devalued home is dumped on the borrower, who finds himself struggling to make mortgage payments on a house he doesn't own in any meaningful way.

The real solution isn't mortgage modifications: It's to put a stop to the stigma of foreclosure, end the politically correct nonsense about saving people's homes, and let families who made bad investments walk away and start their lives again. Then those houses can be sold to other people who have the assets and income to make a good investment at the right price.
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