Is the mortgage loan modification system helping or hindering the real estate recovery?  A recent article in the New York Times sheds light on the theory that by encouraging homeowners to stay in homes that they cannot really afford, Obama’s Making Home Affordable program is actually increasing the agony of homeowners, who pour money down the trap of their home loan rather than recognizing the loss and starting over.  In the meantime, the mortgage refinance and mortgage modification programs disguise the true state of bank balance sheets because modified mortgage loans are not yet non-performing home loans, and slow down the process of recovery.

But I think that the so far lackluster results from MHA do point to something important, which is that we don’t have the kind of mortgage crisis we thought we had when we passed the modification.  This represents not only a shift in our thinking about how to fix the housing markets, but a major shift in our national narrative about the housing bubble.  Six to nine months ago, the major story we told in connection with the financial crisis was the homeowner suckered–by either fraud or greed–into a teaser loan with an artificially low interest rate that was going to turn disastrous when it reset.

We have seen some of that, to be sure, particularly with the “Option ARM” or “negative amortization” loans on which homeowners weren’t even making the full interest payment.  But that hasn’t turned out to be our biggest problem, largely because we are in a very low interest rate environment right now, so many people saw their rates reset downward rather than up.  Instead, we are plagued by negative home equity.  Most mortgage lenders have begun shutting down access to home equity credit lines because of depreciating home values and unemployment.  Look for a proven loan modification program designed to make your bad credit home loan payment more affordable.

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