Arnold Kling  

I Told You So

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Les Christie puts together a scorecard for foreclosure prevention programs under the Obama Administration. The programs are all either huge disappointments or "too soon to tell."

In December 2008, after Mr. Obama had won the election but before he took office as President, I wrote,


What we need is an honest housing market, with legitimate owners, legitimate renters and prices that balance supply and demand. Loan modifications undermine the honesty of the market. They delay the necessary adjustments. With foreclosures, it might take two years for the housing market to find a bottom. With loan mods, it will take at least ten years.

Read my whole post. 2-1/2 years later, it still rings true.

Given that so much of the business cycle is tied to housing construction and related purchases of durable goods, it is fair to say that the overall economy is unlikely to overcome a dysfunctional housing market. Which is what the loan modification programs have managed to sustain. Who wants to invest in a house while there are still so many houses "owned" by people who cannot afford them?

In my opinion, mortgage loan modifications are the biggest macroeconomic mistake of the Obama Administration. I could not tell you whether the stimulus bill helped or hurt. I am skeptical that the health care bill or the Dodd-Frank bill had much effect. But I am pretty sure that I was right in 2008 when I said that the housing crisis would be prolonged by efforts to modify mortgages. As you look around for places to cast blame for the depressing job statistics, do not overlook loan modifications.

I told you so.


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COMMENTS (3 to date)
John Thacker writes:

A DC law intended to help distressed homeowners has made foreclosed properties impossible to sell in the DC area, because title insurers won't insure them anymore.

Jonathon Hunt writes:

Ron Paul told us so in 2002. Just saying.

Joe Cushing writes:

From what I understand, most people can't get a modification and the foreclosures are continuing right along. What is holding up the process is that the processors have little incentive to move quickly as it is not their money at risk. That said, if they did principal reduction modifications, that would be better than foreclosure. You wouldn't have the 12 month or so time where the house sits empty and boarded up with 3 foot high grass in the yard, squaters, vandals, etc. The lenders, could often save money by lower principal instead of foreclosing but some reason they prefer the foreclose rout better. When they do do a modification, they are so wed to the idea that they don't want to lose principal that they strap people in homes they should have just let go. I think these are the ones you are saying will drag on for 10 years but I don't think there are really that many of them. Many go back into default anyway.

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