Mortgage modifications have done more harm than good

January 3, 2010

I argued in a prior post that the best way to deal with a deflating bubble was not to try to reflate that bubble. Instead of letting the real estate market reach equilibrium by letting prices fall to the point where the market clears and letting people who cannot afford their housing move to cheaper rentals, it has tried to keep homeowners in place through a combination of policies: mortgage modifications, subsidized low mortgage rates and tax credits.

The net impact seems that at great cost it has prolonged the agony for existing homeowners who tend to default at a later date anyway and who would have been better off cutting their losses and moving into rentals they could afford.

Not only has it been detrimental to existing homeowners, but it’s also unfair to those who have been wisely renting for many years and are not getting the benefits of lower prices as the market is not being allowed to clear. It’s all the more unfair as many of those people will be bearing a disproportionate share of the bailout burden as they will be taxed to pay for the follies of others.

There is a great article in the NY Times analyzing the early results from the program. Read it at:
http://www.nytimes.com/2010/01/02/business/economy/02modify.html?hp

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