Mortgage modifications, take two: Obama tries a bigger stick to make banks lower loan payments

You know that old saying about how in life there are no second acts? Perhaps not. But that doesn't apply to government work.

On Monday, the Obama administration is set to try one more time to get mortgage companies to reduce payments in an effort to bring a halt to ever-mounting foreclosures.

The first effort was a huge flop: Of the half million or so loan modifications made since the first push was on, only about 2,000 became permanent, according to a Congressional oversight panel.

In an interview with the New York Times, Michael Barr, the Treasury Department's assistant secretary for financial institutions said, " The banks are not doing a good enough job ... some of the firms ought to be embarrassed, and they will be."

Shame seems to be the weapon of choice this time around for the Obama administration, the idea being to shame lending institutions into permanently lowering mortgage payments by naming the recalcitrant ones publicly.

The problem with this tactic is this (listen up White House, this is for you!) -- the banks simply don't give a damn.

They have already used billions of taxpayer dollars to stay afloat and even thrive, while giving little back in the way of loans to the community; they have largely turned a deaf ear to troubled home owners.

Now, of course, the government intends to use a stick to try and beat the banks into submission -- but a stick not big or strong enough to inflict that much damage: The government will announce it will not pay out cash incentives promised to mortgage companies that modify loans until such time as the reductions become permanent.

But the lending institutions make so much money on fees for missed mortgage payments, that losing out on cash incentives to lower mortgage rates, which would enable many homeowners to avoid extra fees, may not be so attractive to the banks.

The real solution to mortgage modification is to change the law to empower bankruptcy court judges to reduce the loan's principal -- banks almost always just lower the interest rate.

There was a time when Obama supported this, but that was before the powerful banking lobby clearly changed his mind.

So, my bet is, this latest government attempt at mortgage reform will also fail, perhaps leading the way for act three sometime in the not too distant future.

Charles Feldman is a journalist and media consultant and co-author of the book, "No Time To Think- The Menace of Media Speed and the 24-hour News Cycle."

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