NPR logo The Latest Loan Modification Plan: Don't Get Your Hopes Up

Housing

The Latest Loan Modification Plan: Don't Get Your Hopes Up

Bank of America said today that it will reduce the debts of some people who are underwater on their mortgages.

The program could apply to about 45,000 mortgages, including some of the exotic time bombs that BofA acquired when it bought Countrywide a few years back.

Those time bombs — such as loans that allow borrowers' debt to increase over time — are exploding now. And BofA, like other lenders in a similar position, has decided that reducing the principal on some loans is cheaper than foreclosing and re-selling the homes, Chris Mayer, the Milstein Professor of Real Estate at Columbia's business school, told me.

"They're just stating the obvious, which is that they're not going to get paid back in full," he said.

Several mortgage modification programs have made headlines over the past few years, but their impact has been limited.

A new report points out that the federal government's own program has led to fewer than 200,000 permanent modifications in its first year, a figure Treasury calls "disappointing."

And those modifications haven't reduced the principal the borrowers owe. In some cases, though, they allow borrowers to make smaller payments now and larger payments later. That sounds a lot like the loans that helped create the problem in the first place.

"This is a kick-the-can-down-the-road move," Adam Levitin, a mortgage-lending expert at Georgetown Law School, told me. "If they homeowner needs to move or refinance, they have to pay all that off."

There's a broader issue here. While 20 million Americans are underwater on their mortgages, mortgage modification programs only make sense for a relatively narrow slice of those people: those who still have enough income to keep up with a reduced mortgage payment, but who would be likely to default on their loan if they didn't get the modification.

That leaves a lot of people who will still wind up defaulting on their mortgages, and a lot more houses that will go into foreclosure.

"There is no great solution," Mayer said. "We're going to muddle along."

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