Is the federal mortgage modification program worth it?

Placebo

Just like a placebo, the mortgage modification program seemed like medicine but it was only a sugar pill. Image from Wikimedia Commons.

After the presidential election in 2008, President Obama went on a bit of  a glut when it came to stimulus programs. Among the first announced was a program called Make Home Affordable, which was a mortgage modification program through the Federal Housing Administration. The FHA works with an applicant’s loan lender, and try to find a way to rearrange the loan to the benefit of all involved. However, the cash advance that was drawn from the Treasury for this program may have been ill spent.

 

Loan modification from Uncle Sam

The way that the Make Home Affordable program works is that a person who wants to modify the bank loans on their home has to apply for the modification. If the application is accepted, the government, working in coordination with the applicant’s lender, sets up a trial program for a few months. The payments and the loan are restructured on a trial basis, to see if the person can still meet their payment obligations. If the temporary modification is successful, then a permanent modification is made. It sounds simple enough. However, the question becomes whether enough modifications become permanent to justify the program.

Fewer than half are successful

According to the Wall Street Journal, less than 50 percent of all such modifications are successful. In August, an audit of the Home Affordable Modification Program, or HAMP, revealed that only 434, 716 successful permanent modifications have gone through so far. There were 616,839 trial modifications that were canceled. That is a lot of fast cash down the drain. Also, the people who apply are already at incredible risk. The average ratio of debt to income for HAMP participants is 63.5 percent. A person has to have a debt to income ratio of 41 percent or lower to get an FHA mortgage, usually the biggest source of bad credit loans for homes.

Some stimulus

This program was intended to help keep people out of foreclosure. Given that about 40 percent of applicants end up back at square one anyway, it might be time that this program was cut, and modification was left to the private market.

Sources

Wall Street Journal

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