Streamlined Mortgage Modifications = Welfare?

Streamlined Mortgage Modifications = Welfare says University of Chicago economist.

I agree with this. I should also state that I agree with a government loan modification plan - but it should focus on reducing principal and eliminating foreclosures - not reducing monthly payments which only delays foreclosure.

Both the Treasury and FDIC plans have the common flaw that they are focused on setting loan payments as a % of income - regardless of the value of the underlying asset and the principal value of the loan.

For example, two people both paid $500,000 for an identical house with an identical loan in 2005. Suppose the house is now worth $250,000 and they are both deeply underwater, and have a strong incentive to default - regardless of their income. If they are offerred different government backed mortgage modifications based on their current income, then it can be argued that the mortgage plan is a hidden welfare program or tax.

If the policy goal is to stop preventable foreclosures, both homeowners should be offerred the same deal - a new $250,000 mortgage at a fixed market rate with any gain from a future sale shared between the homeowner, the lender who forgives the principal, and taxpayers who insure the new loan. The % of income should only be used to determine if they qualify for this new loan, and afford their house at current market prices. If they can't, foreclosure should proceed.

See previous posts for more, here and here.