Most loan modifications leave homeowners without equity and paying excessive housing costs
Most home loan modifications leave homeowners without equity and paying excessive housing costs
The continuing decline in nominal rents is making it ever more apparent that the main beneficiaries of mortgage modification programs are likely to be banks.
Under some of the proposals being discussed, the government would pay up to $50,000 to keep homeowners in their homes. In the vast majority of these situations, even after a loan has been modified, homeowners will be paying considerably more on their mortgage and other ownership costs than they would to rent the same home.
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In the markets that were most inflated by the bubble, this difference can be well over $1,000 a month. In other words, each month that the government keeps the family in their home as a homeowner is a further drain on their income and savings.
Also, in the vast majority of cases, homes are sufficiently underwater such that there is no reasonable prospect that the homeowner will ever build up equity in their home.
It seems that many policymakers even now have not come to the grips with the housing bubble. They fail to recognize that the surge in house prices from 1996 to 2006 was a one-time blip that is now in the process of being corrected. There is no more reason to expect that house prices will rise back to bubble-inflated levels than there is to believe that the NASDAQ will return to the peaks of the Internet bubble in 2000.
As a result, most of the homeowners who receive modifications are likely to find that they either have to bring cash to a closing, arrange a short sale, or default at some future date.
If mortgage modifications, intended to stop foreclosure or reduce housing costs, actually cause homeowners to pay more money for housing for each month they stay in their home and still leave them with no equity when they sell their home, it is difficult to see how this policy helps homeowners.
The money that the government pays out is going to banks and other lenders, allowing them to collect much more money on their loans than would likely be the case without modifications. Unlike the TARP funds, which were loans that had to be repaid with interest, the money that the government pays in modifications is simply given to banks.
Policymakers who are interested in helping homeowners facing foreclosure must focus on developing policies that either ensure that homeowners will be paying comparable amounts to the rent on a similar unit and/or that they will actually have equity in their home at the point where they sell it. A policy that both raises monthly housing costs and leaves homeowners with no reasonable prospect of accruing equity is not helping homeowners.
Source: http://mrzine.monthlyreview.org/baker131209.html
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