Mortgage modification program isn't stopping homeowner defaults

mortgage-modification-program-isnt-stopping-homeowner-defaultsThe idea behind the $75 billion Home Affordable Mortgage Program is to give homeowners facing foreclosure a means to get lower monthly payments and stay in their houses. The participants must successfully complete a trial period and provide additional documentation to prove that they're able to make these modified payments. They are then eligible for permanent modifications in their loans.

Assistant Treasury Secretary Herbert Allison has provided data to the Congressional Oversight Panel that shows "over 73% of borrowers are current in their trial plan payments," according to documents obtained by Reuters. That's a pleasant way to say that more than a quarter are behind.

Banks have been slow in converting mortgage holders from the trial program to permanent status. It may be that they have an idea of how high the default rate of home loans in the program is becoming.

The news is a setback for the Obama administration's efforts to help mortgage holders get affordable payments by reworking loans held by private-sector banks. These banks are losing whatever incentive they might have gotten from government payments to permanently modify home loans, because high mortgage-default rates undermine their balance sheets.

The government and the lending industry know the probable root causes of the default problem, and there's nothing that can be done about them in the short term. People who have lost their jobs are unlikely to make home loan payments even if their monthly obligations have been lowered.

Other mortgage holders are finding that their home loans are "underwater" and that all of the equity in their homes has been lost. As housing prices continue to fall, this problem becomes more acute. People who will have to pay their banks the difference between their mortgage balances and the value of their homes if they want to move have little incentive to keep up with home payments.

The Home Affordable Mortgage Program is not going to have any significant success while the root causes of home loan defaults remain unaddressed.

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

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