Financial Blogger On Ethics Of Mortgage Modification

ROBERT SIEGEL, host:

As we just heard, some commentators have been critical of the Obama administration's new plan to prevent foreclosures. They cite the problem of moral hazard. It rewards homeowners who bought and borrowed beyond their means, and it punishes those who didn't.

We're going to hear from one such critic, Barry Ritholtz, founder of the financial blog, The Big Picture and author of the book "Bailout Nation." Welcome back.

Mr. BARRY RITHOLTZ (Founder, The Big Picture; Author, "Bailout Nation"): Thanks for having me.

SIEGEL: And many American homes are now worth less than the mortgages on them. Should the government be trying to keep them from foreclosure?

Mr. RITHOLTZ: Well, all these programs seem to be geared to do two things. First, they're giant giveaways to the big banks. These are designed to prevent banks from actually having to take the full foreclosure write-down right now.

Even if these mortgages are modified 10, 15, 20 percent, the number of recidivist delinquents a year later are still in excess of 50 percent. In other words, more than half of these modifications ultimately fail, and that's pretty much after we've exhausted these families' assets, the banks have squeezed every last dime from them that they can get.

SIEGEL: But what's the risk of providing some kind of mortgage relief, whether it's a suspension of full monthly payments, or whether it's a reduction in the principal for somebody whose house plummeted in value and who is also unemployed and really will have a very hard time making the payments regardless?

Mr. RITHOLTZ: From a broad perspective, again, you're keeping them in a house that they can't afford, and they'd be much better off going to a place that leaves them a little spare change in their pocket, as opposed to just draining everything they have to make those payments.

Secondly, if these banks have their balance sheets just festooned with bad loans, we're not allowing them or not forcing them to do what they're supposed to do, which is take the write-down, get it off their books, free up some capital and move forward as a healthy lending institution.

SIEGEL: There's another party to this I want you to address, and that is homeowners who are not underwater, indeed who may have paid off their mortgage or never had a mortgage, for that matter. If the banks, indeed, do clear of all the bad mortgage loans from their books, and we foreclose on everything that's to be foreclosed on, everyone's real estate values would go down as a result, wouldn't they, and therefore homeowners have a stake in seeing that not happen?

Mr. RITHOLTZ: Yes, that's true. But remember, a lot of the value that we've seen, the quote-unquote "price gains in homes," were completely artificial. So by propping up home prices, you're punishing everybody who is waiting to buy a house. Anybody who's been saving, you're forcing them out of the housing market because you're artificially maintaining this house price. And I say this as someone, we own a home, we have a vacation property. It's not in my interest to see home prices come down. But for the rest of the economy, it's in our interest to see prices normalize, and that hasn't happened yet.

SIEGEL: So if you had the president's ear, looking ahead to a few million more foreclosures that seem to be lurking out there in the future, you would say: Look, it's going to hurt, but better to let it happen.

Mr. RITHOLTZ: Better to let it happen. And if you want to help the people who are in these situations, what you could do is offer them move-out money. Instead of giving $14 billion in additional bailout money to the banks for these programs, facilitate a short sale, give them $1,000 to get a mover, pick up and move across town. There are a lot more effective ways to spend $14 billion than essentially rewarding the banks that were just so reckless and irresponsible. It just doesn't make any sense.

SIEGEL: That's Barry Ritholtz, who writes the financial blog, The Big Picture. Thanks for talking with us once again.

Mr. RITHOLTZ: Thanks for having me.

(Soundbite of music)

This is NPR.

Copyright © 2010 NPR. All rights reserved. Visit our website terms of use and permissions pages at www.npr.org for further information.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.