Bailouts push the moral dilemma envelope
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Fannie Mae and Freddie Mac announced plans Tuesday to ease the mortgage modification process for troubled homeowners. As reported in the Los Angeles Times:
Under the program announced Tuesday, a homeowner who lives in the home in question and misses at least three loan payments could qualify for a streamlined workout designed to reduce the monthly payment to 38% of the borrower’s gross income.That would be accomplished by doing one or more of the following: extending the term of the loan to 40 years; lowering the interest rate temporarily or permanently; or excluding part of the loan balance when calculating the monthly payment.With the last option, known as principal forbearance, the amount owed by the borrower would not change and would have to be paid back when the house was sold or refinanced.
The Times’ Tom Petruno looks at the issue at the Money & Co. blog:
Is there really a big moral-hazard risk in this plan? If you believe that many people will try to cheat their way to a modification, you will be interested in the views of the well-known libertarian investment manager Peter Schiff of Euro Pacific Capital. Here’s his take, which he sent by e-mail Tuesday:By offering to reduce mortgage payments to 38% of household income for homeowners who are 90 days delinquent, the mortgage program announced today will spark a new wave of delinquencies. In a classic case of unintended consequences, the plan will encourage homeowners to rearrange their finances to qualify for the benefit. Those who could conceivably economize to meet their existing obligations will now have a strong reason to forgo such sacrifices.The intentional reduction of income is also a possibility. In many cases dual-income families may decide to eliminate one job altogether as reduced mortgage payments combined with lower child care and other work-related expenses will likely exceed the after-tax value of the lost paycheck.It may also be tempting for some homeowners to temporarily quit high-paying jobs, or delay job searches, and accept low-paying jobs while the creditors consider their fate. Once their mortgage payments have been modified to fit their diminished incomes, these homeowners would then be free to pursue better-paying jobs. With mortgage payments reduced to a fraction of their prior payments, these workers will have much more employment flexibility than those foolishly struggling to meet non-modified mortgages.
L.A. Land readers have been pointing out similar concerns since the get-go.
-- Lauren Beale
Thoughts? Comments?
