From talking to experts I've identified several problems in the President's approach to fixing the housing crisis.
- Moral hazard: is the government incentivizing people to do the wrong thing? For instance people who might skip a few payments in order to qualify for a modification. How about the larger issue of telling people they don't have to pay what they owe because the government will bail them out?
- Modifications (Mods as they are called) don't work. One expert told me 50-60 percent of payment modifications result in re-default. Why? People can't make their payments. Reducing their payments to 31 percent of income may not help them if a-they have lost their job, b-if they have other consumer debt.
- Who is on the hook for maintaining the house? If you are underwater in your mortgage and the government modifies your loan, you become, in effect, a renter. You don't really care about maintaining the property. At least with rental property, there is an owner concerned about upkeep.
- Zombie homeowners: if you can't afford your payment today and the government helps you modify your payment, it does so only at this moment in time. If the value continues to go down, you are back where you started. And if the value keeps falling in five years your payment goes back up under this plan perhaps creating a terrible financial shock down the road.
- My question is what helps arrest the slide of home values?
