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07/17/2009

The Worst Solution to the Financial Crisis, by Arnold Kling

Daniel Indiviglio reports on a chart from the Wall Street Journal that shows more than one quarter of mortgage loan modifications are redefaulting. He comments,


Re-default is a huge problem, because it means those homes should have just undergone foreclosure instead of modifying their underlying mortgages. After all, if those borrowers default again, the modification merely delayed the inevitable. This might indicate that the modification efforts are more focused on getting all troubled homeowners to modify, without really determining who can successfully manage those modification terms.

I've said from the very beginning that most cost-effective thing government can do is pay for moving vans to get these people out of the homes they should never have bought in the first place. The advocates of loan mods tend to be folks like Martin Feldstein, who have never held a job in mortgage servicing. The reality is that the borrowers often redefault, and the administrative costs of modifying a loan can be even higher than those of going through foreclosure.

All sorts of people tout loan mods as a win-win. The truth is that more often than not they are a lose-lose.


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