The Obama administration has put $75 billion towards helping homeowners avoid foreclosures through its loan modification program. Unfortunately, it doesn't seem to be working as well as it may have sounded on paper. The program tries to encourage lenders to modify existing mortgages by paying them $1000 for each modified loan and a further $1000/year for another 3 years if the borrower avoids foreclosure during that time. This program was based on the assumption that homeowners would prefer to stay in their homes as long as they can make the monthly payments. It seems to me (and this position has been taken by Warren Buffett as well) that the problem is not the home's value, but the homeowner's ability to pay the monthly bills.
Wouldn't this $75 billion be better spent creating jobs or creating incentives for job creation? Paying a lender a mere $4000 over 4 years is not going to be of any help if the homeowner is unemployed and cannot make his mortgage payments. Depending on the level of supply of homes in a given area, the bank may be better off foreclosing on the loan and taking ownership of the property.
$75 billion represents 1.5 million jobs at $50,000/job. If that money was used towards tax breaks and small business incentives, that could create several million full time jobs. Once people have full time jobs, they buy houses and make mortgage payments, all without the government's financial incentives. The additional downside to the government's loan modification strategy is that in the long term it is inflationary. Printing money to hand out to banks to encourage changing loan terms does nothing but create inflation and is debatably effective as a strategy anyway. Job creation is a much better way to help individual borrowers, is not inflationary and is a better long term investment
(Diane Aronovic is a former Managing Director at Bank of America Securities, and a real estate agent at Red Lady Realty in Crested Butte, CO)