the fear of a continuing loss of wealth (which is a cushion against job loss or other economic emergencies), the fear of job loss itself, the negative effects of underwater homes, lack of forbearance for unemployment (a point the Fed particularly emphasizes), and consumers struggling to meet mortgage payments in a far more difficult environment are all dragging the economy down.
He cites some recent Fed memos that argue for more foreclosure prevention. I want to try, once again, to clear up some misconceptions about modifying loans to prevent foreclosures.
1. Loan modifications do not create wealth.
A loan modification redistributes wealth The borrower gains and the lender loses. To the extent that home prices are higher than they would otherwise be, current home owners gain and potential home owners lose.
2. Loan modifications do not eliminate deadweight loss. Yes, foreclosures involve deadweight loss-the cost of moving and so on. But loan modifications also involve deadweight loss. It costs servicers a lot of money to train workers to implement loan modifications according to whatever rules are set up.
3. Many borrowers are not eligible for loan modifications. Many are speculators who are not living in the homes that they bought. A lot of the cost of implementing a loan modification program is determining eligibility.
4. Loan modifications often go bad. Redefault rates can be in the range of 50 percent.
As I have said many times, foreclosure prevention keeps the housing crisis in front of us, rather than putting it behind us. It is an exercise in futility that is equivalent to the oil price controls of the 1970s.
I think that the Obama Administration is the victim of bad luck in terms of the economy that it inherited. However, it made the worst of a bad situation, and foreclosure prevention programs were perhaps the most significant error.