The Corner

Drop in the Bucket

The redefault rate on the administration’s Making Home Affordable mortgage-workout scheme is 25 percent. Another 50 percent are making payments but have failed to submit the proper documents to prove that they’re eligibile for the program. Only 25 percent of 650,000 borrowers are making it through the modification process, out of an estimated 4 million facing foreclosure.

Why isn’t the program working? Cato’s Mark Calabria supplied the answers at a hearing earlier this fall, but they weren’t the ones Congress or the administration wanted to hear:

The short answer to why previous federal efforts to stem the current tide of foreclosures have largely failed is that such efforts have grossly misdiagnosed the causes of mortgage defaults. An implicit assumption behind former Treasury Secretary Paulson’s HOPE NOW, FDIC Chair Sheila Bair’s IndyMac model, and the Obama Administration’s current foreclosure efforts is that the current wave of foreclosures is almost exclusively the result of predatory lending practices and “exploding” adjustable rate mortgages, where large payment shocks upon the rate re-set cause mortgage payment to become “unaffordable.”

The simple truth is that the vast majority of mortgage defaults are being driven by the same factors that have always driven mortgage defaults: generally a negative equity position on the part of the homeowner coupled with a life event that results in a substantial shock to their income, most often a job loss or reduction in earnings. Until both of these components, negative equity and a negative income shock are addressed, foreclosures will remain at highly elevated levels.

Even the New York Times is catching up: Floyd Norris reports that the plan is failing because many homeowners cannot afford to pay back the principal they owe. Banks are cutting interest rates to as low as 2 percent, stretching terms out up to 40 years and in some cases shielding part of the principal from accruing any interest at all. The administration’s plan is to help homeowners and banks conspire to pretend that just the principal on these loans can someday be repaid. But they can’t — not unless housing prices miraculously recover to their bubblicious highs. Won’t happen. See this chart for details. 

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