Should The Government Scrap Its Mortgage Modification Program?

Some things just need to be put out of their misery. Is the government's mortgage modification program better off dead? It's falling far short of expectations. At this point, it's kicking out more potential participants than new ones it's accepting. It's no wonder Oversight and Government Reform Committee Ranking Member Darrell Issa (R-CA) and Domestic Policy Subcommittee Chairman Jim Jordan (R-OH) are calling for the Obama administration to kill the program (.pdf). Should the Treasury formally wind it down?

The evidence of the program's failure is rather overwhelming. After more than a year, only 346,816 permanent modifications have been completed. That's a small fraction of the three to 4 million struggling homeowners the program sought to help. Of course, that also doesn't take into account re-defaults, which will likely be severe considering that temporary interest rate reductions are a predominant method of modification.

A commonly cited problem with the program is its lack of principal reduction. For a while, that looked like it could be a silver bullet. But given the disdain that banks hold for this strategy of mortgage modification, it's hard to believe they'll easily comply with the new tactic when they're required to in the fall. Instead, they'll probably continue to develop their own programs, which they'll find preferable. The incentives from the government clearly haven't been significant enough to attract banks and servicers thus far, since something like only 7% of the modifications by big banks have been through the Treasury program.

If the government does choose to wait and see whether the upcoming changes help through the end of 2010, then it should at least consider scaling down the program. At this point, it would be shocking if it helps more than 1 million borrowers. Since it was designed to help three or four times that to the tune of $75 billion, at the very least its funding should be adjusted accordingly. Given these numbers, something like $25 billion should be more than enough to help a more realistic number struggling homeowners.