Mortgage modification nation: Who really deserves a cheaper mortgage?
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Nelcisco, a regular commenter here, is now working in a booming field in California -- loan modifications. We talked today and he told me he’s worried that loan work-outs might become trendy -- even for borrowers who don’t really need them:
‘My biggest concern is that people who are not in distress and not in need of a loan modification are going to start pursuing loan modifications. And that’s where it’s going to get ugly. That’s where you’ll see the backlash.’
Reporter David Streitfeld explores the same thorny issue in Friday’s New York Times: How do you determine who really deserves a loan modification that reduces their mortgage payment? How do you prevent people from deliberately defaulting their way into a lower payment? And what do you say to the ‘sober souls’ who borrowed responsibly and keep on paying the mortgage on their upside-down houses while everyone around them gets a break?
“Why am I being punished for having bought a house I could afford?†asks homeowner Todd Lawrence of Norwich, Conn. “I am beginning to think I would have rocks in my head if I keep paying my mortgage.â€
This is going to be messy. If banks are cutting deals, everyone is going to want a deal. Pimco’s Paul McCulley tells Streitfeld, ‘“If the lunch truly is free, the demand for free lunches will be large.’
Also quoted: economist Peter Schiff, who says underwater borrowers will strongly consider defaulting in order to get government help: “If the government says, ‘Prove that you can’t afford your house and we’ll redo your mortgage,’ then people are going to try to qualify,†Mr. Schiff said.
Two cents: This story is a reminder of a key factor in the housing bubble that started all this: The American consumer shares and spreads business tricks and trends at lightning speed; the American government, by contrast, is very slow to catch on. So, during the bubble, consumers quickly learned from each other how to buy real estate with no money down, how to suck the equity out of their homes and spend it, how to squeeze into a big house by paying a tiny teaser rate. There’s little evidence government regulators learn as quickly -- during the bubble, they simply didn’t notice the degree to which consumers had embraced risky, and ultimately disastrous, borrowing.
--Peter Viles
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