Most modifications are likely to still leave homeowners paying more in ownership costs than they would pay to rent a comparable unit. This means that each month, they are effectively throwing away money that they could otherwise spend on their children, on saving, or other uses. It is difficult to see how this excess spending on housing benefits homeowners and their families.
By contrast, if government or GSE funds are used to either pay for a principle write-down or buy mortgages at above market prices, then the banks will be clear beneficiaries. Payments from the government to banks for write-downs on loans where they would have otherwise taken large losses are, in effect, a direct subsidy to banks. The same is true when the government pays an above-market price to purchase a mortgage. With Fannie Mae and Freddie Mac now authorized to draw more than $200 billion each from the Treasury, it appears that a much larger subsidy will be given to the banks through various mortgage programs than through the TARP.
The obvious alternative to mortgage modification programs that benefit banks more than homeowners is legislation that directly benefits homeowners facing foreclosure by giving them the right to stay in their home as renters paying the market rent. Right to rent legislation that allows homeowners to stay in their homes for a substantial period of time (5-10 years) would immediately give homeowners facing foreclosure security in their homes. It would also prevent the blight of vacant foreclosed properties that have devastated many neighborhoods. And it would give banks much more incentive to negotiate modifications, since foreclosure would be a less attractive option.
However, right to rent laws would mean challenging the banks. Even in this crisis there is still very little will in Congress to do anything that might seriously reduce banks’ profitability, so the prospects for right to rent legislation is not good.
Wednesday, January 13, 2010
Mortgage Modifications: What Is the Point? - CEPR
In discussing government programs to help alleviate the foreclosure problem Dean Baker writes the following.