Dealing With Expensive Loan Modifications On The Cheap

Writing for the New Yorker, James Surowiecki looks at difficulties stemming the tide of foreclosures with loan modification programs.

“Even though direct aid would likely keep more people in their homes than current measures, the idea hasn’t gained much traction, not just because Americans are wary of spending more money but also because it would exacerbate our concerns about fairness. When Obama’s current plan was floated, public support was widespread but grudging; by a two-to-one margin, voters described it as unfair to ordinary homeowners. There’s a phenomenon in charity called the “identifiable victim” effect: the best way to get people to give is to focus on one person who’s going to benefit from the donation, rather than on a large group. When it comes to government programs, though, identifiability seems to be more a curse than a blessing. No one was happy about bailing out big financial institutions, after all, but the news that a group of A.I.G. employees were going to get bonuses really set people off. In a similar way, while voters may reluctantly support making refinancing easier or helping people lower their interest payments, they’re likely to balk at the idea of literally paying the mortgage of the guy down the street.”

The Treasury Department released the first monthly progress report on its plan to aid homeowners through loan modifications. The findings merit less than a "D" as only 9% of homeowners eligible for the program have received trial modifications.

The Treasury also released a breakdown of modifications, by loan servicers as shown by the WSJ chart below. Click here to see a sortable list from the Treasurer and other charts.

A parting word of warning from Surowiecki on the viability of the Administration's loan modification efforts:

It seems more likely, though, that we’ll just keep muddling through with the current approach, which offers us the sense that we can get quite a lot without spending much. Maybe it’ll work. But the housing bubble was very expensive. It’ll be surprising if we can deal with its consequences on the cheap.