Boston Fed Looks at Why Loan Modification is Having Limited Success
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For many, one of the options to try when it comes to foreclosure prevention is loan modification. In this process, mortgage lenders modify the loan, changing such terms as interest rate, payments and sometimes even principle. However, even with the incentives being offered to mortgage lenders to engage in loan modification, such programs are having limited success. And the Boston Fed has an inkling of why that is. Boston.com reports on the limited success that loan modification is likely to have when it comes to arresting housing market problems:
The Boston Fed’s findings suggest the Obama administration’s major effort to solve the foreclosure crisis by giving the lending industry $75 billion to rewrite delinquent loans to more affordable levels is not likely to work.
One of the study’s coauthors, Boston Fed senior economist Paul S. Willen, said the government would be better off giving the money directly to struggling borrowers to help them with their payments, rather than to lenders that are averse to working out the troubled loans.
“Loan modification is not profitable for lenders,’’ Willen said. “If it were profitable, they would go out and hire staff.’’
The bottom line is that we are still in a “trickle down” mentality. We still believe, as a society, that if we have to give money to someone, it should be to the businesses. And then those folks will use the money in such a way as to benefit everyone. Nearly three decades of such policies have given us precious little evidence that this ever happens, but we persist. Perhaps the Fed is on to something. If troubled borrowers were given direct aid, it is more likely to “trickle up” as homeowners made their payments and banks did not have as many defaults.
The other option, of course, is to ride it out and let market forces do what they will to correct the problem. However, that is an unlikely scenario, since we have had socialized capitalism for years and years now, and most businesses really do not actually want to have any sort of true free market capitalism.
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