Federal Mortgage Assistance: It May Not Help

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Henry Paulson has taken a lot of heat for putting TARP funds into big banks and ignoring the needs of homeowners struggle to pay their mortgages. Sheila Bair, head of the FDIC, says that the federal government has to get into the business of lowering interest rates and stretching out payment terms to cut foreclosure rates.

It turns out that Paulson may have the better approach.

New data from The Office of the Comptroller of the Currency and the Office of Thrift Supervision shows that even mortgages which have been modified in favor of the homeowner default at an extremely high rate. The report issued by the agencies says" The number of loans modified in the first quarter that were 60 or more days delinquent was 19 percent at three months and nearly 37 percent after six months."

“One very troubling point is that, whether measured using 30-day or 60-day delinquencies, re-default rates increased each month and showed no signs of leveling off after six months and even eight months,” said Comptroller of the Currency John C. Dugan. “This trend of increasing delinquencies underscores the need to understand why these modifications have not been more sustainable.” 

Part of this problem may be due to rising unemployment. People without jobs are obviously extremely likely to default on mortgages. But, the problem may be more intractable that than. Homeowners with mortgages that are "underwater" may simply reach a point of economic despair where they feel that whether they stay current on home payments or not, they will never see the value of their homes return to a level where they can be sold for more than the level of the mortgage.

The data would argue that having the federal government actually getting into the business of buying foreclosed homes, no matter how repugnant the idea may be, could be the only solution to putting a foundation under home prices which should be encouraging to the man who is unable or ambivalent about making his monthly home payment. At least he will feel that Uncle Sam is as badly off as he is.

Douglas A. McIntyre