Dukes of moral hazard

President Obama made clear that his plan to prevent home foreclosures "will not rescue the unscrupulous by throwing good taxpayer money after bad…and will not reward folks who bought homes they knew from the beginning they would never be able to afford."

But details have suggested that his plan will do all of the above, says the Wall Street Journal. What is the plan's effect on the individual borrower?

Anyone with mortgages owned or guaranteed by Fannie Mae or Freddie Mac will be able to refinance at lower rates if his mortgage is between 80 per cent and 105 per cent of the value of his home.

Existing borrowers who may not qualify for Fan/Fred refinancing can still receive loan modifications that move their mortgage payments down to 31 per cent of their monthly income.

In either case, no effort will be made to verify that recipients of aid were truthful on their original mortgage applications.

Given that mortgage fraud skyrocketed during the housing boom, it is likely that the unscrupulous will be among those rescued.

The government will pay loan servicers $1,000 for each mortgage modified, and share the cost of lowering the monthly payments. But the recent history of mortgage modifications isn't encouraging. According to the December report by the Comptroller of the Currency, for modified loans that were 30 or more days delinquent:

Nearly 37 per cent of them re-defaulted after just 3 months.

55 per cent re-defaulted after 6 months.

For modified loans that were 60 or more days delinquent:

19 per cent re-defaulted after 3 months.

37 per cent re-defaulted after 6 months.

Said Comptroller John Dugan, "One very troubling point is that, whether measured using 30-day or 60-day delinquencies, re-default rates increased each month and showed no signs of levelling off after six months and even eight months."

Source: Review and Outlook, Dukes of Moral Hazard, Wall Street Journal, February 19, 2009.

For text: http://online.wsj.com/article/SB123500760093118475.html

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 24 February 2009