Programs to help mortgage holders are failing

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It would seem to make sense that a homeowner having trouble making mortgage payments would welcome the chance to see monthly payment costs reduced.

In an attempt to cut down home loan defaults and stabilize housing prices, mortgage loan companies have begun modifying monthly payment terms. The Administration has also introduced a plan to help finance an acceleration of these projects.

All of that good will and capital do not appear to be working. According toThe Wall Street Journal, a new report from credit rating agency Fitch shows that the rate of mortgage defaults has hardly been affected at all by programs to help troubled homeowners. The paper writes, "Fitch said a conservative projection was that between 65% and 75% of modified subprime loans will fall 60-days or more delinquent within 12 months of the loan change."

Why don't the programs work? Fitch guesses that because home prices are still falling, homeowners see their houses as economic sink holes whether the monthly payments change or not. The modification programs do not change the principal owed on homes, which are often valued at much less than their mortgages. The prices of those houses may not recover to 2005/2006 levels for years, if they ever recover that much at all.

The more likely reason that the programs do not work is the rise in unemployment and the increase in the business practice of turning full-time workers into part-time workers, sharply cutting many people's incomes. Even with monthly home payments cut, mortgage holders can't pay with money that they don't have.

If the mortgage modification programs are going to work, two things have to happen, both of them unlikely. Unemployment would have to bottom soon and mortgage principals would have to be lowered as part of the loan modification process. Neither of those is likely to change soon.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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