24/7 Wall St. TV: The Mortgage Mess: Government To Push Private Sector To Do What Government Cannot Do

Congress and the Administration put a $787 billion stimulus package into place on the assumption that its many programs will supply capital to strategically important industries.  The ultimate goal was to increase employment within the private sector.  Infrastructure, energy grid, and broadband are among the industries which are receiving extraordinary sums from the government and those industries are expected to do aggressive hiring.

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The trouble with the stimulus program is that it has not worked, at least based on its own major goal which was to create or save 3.5 million American jobs. The economy is still losing 300,000 jobs a month. That may be down from the 700,000 at the beginning of the year. But, the stimulus is not working based on the goals for its creation.
The other large program that Congress and the Administration have put into place is a $75 billion fund that will provide capital to help people whose homes are moving into foreclosure. This program has not helped either. RealtyTrac reports that over 930,000 homes went into foreclosure in the third quarter of this year. There is absolutely no evidence that the numbers will improve much during the current period.

The Administration’s argument for the apparent failure of the economic stimulus package and the foreclosure program are fair enough. The programs have not been in place long enough to carry out many of their goals. The Administration says that the results will be better in 2010. That will be a bit late for hundreds of thousands of workers and homeowners unfortunately. And, the anticipated success in 2010 is nothing beyond a wish which may not even come with a fairy godmother.

It is not clear why, but the Treasury Department means to put pressure on the mortgage industry to increase the number of home loan modifications that they complete. According to The New York Times, “The banks are not doing a good enough job,” Michael S. Barr, Treasury’s assistant secretary for financial institutions, said in an interview Friday. “Some of the firms ought to be embarrassed, and they will be.” Mr. Barr also said that the Treasury will not pay the cash incentives it plans to give to mortgage companies until they make the alterations in home loans permanent and not temporary, which many of them are now.

The Administration’s goals for its “Making Home Affordable” program are in their own way just as lofty as those of the stimulus package. The target of the mortgage package is to save three to four million homes from foreclosure. That fits nicely with the 3.5 million jobs that are supposed to be saved by the federal government.

The Make Home Affordable plan has several weaknesses that are hard to overcome. The first is that mortgage holders who enter the program are given temporary reductions in their monthly home payments. Those lower payments become permanent after a trial period. Anything with two steps administered by the government which works through hundreds of financial institutions and is meant to serve millions of people is almost by definition a failure before it begins.

The home program has another more insurmountable problem that people who default on home loans will often get lower payment plans and then default again. The Office of Thrift Supervision has pointed out in several studies that the number of people who walk away from “improved” mortgages can be as high as one-third within a period of six months from the modification. The reasons for that are not entirely clear, but two factors almost certainly contribute to the trend. The first and most obvious is rising unemployment. The second is that many people do not want stay in houses with “underwater” mortgages. They see no future in owning homes that have no equity in them particularly during a period when house prices are still falling.

Pressuring private financial institutions to modify more home loans in a way that will help people keep their homes may bear moderate fruit, but it is not going to get three or more million mortgages altered. The relationship between home ownership and unemployment is simply too high. The stimulus package and the home loan modification packages seem to address two separate problems within the economy. That is not the case. There is only one problem, really.  Too many people are out of work. That problem will continue to get worse until the government provides some extremely attractive incentives to get businesses to hire new workers and hire them very, very soon.

Douglas A. McIntyre

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Executive Producer: Philip MacDonald