Enough With the Loan Mods: Subsidizing Delinquent Borrowers Doesn't Work

by: Tom Brown

“We know how to prevent foreclosures,” Paul Willen, a senior economist from the Boston Fed, said at a housing conference in Washington Monday. “We just need to be prepared to spend the money.”

Just “be prepared to spend the money”! Economists sometimes make things sound so simple, don’t they? Alas, I have a sense that the “we” Willen was referring to when he was pointing out who should be prepared to do the paying included more than just himself and the other Fed economists in the room. He was being more expansive. Willen meant all of us. Taxpayers. We’re the ones, according to the Beltway conventional wisdom Willen yesterday found himself spouting, who ought to be shelling out money to pay for large-scale loan modifications so that delinquent borrowers to can stay in their homes and “prevent foreclosures.”

Thanks for the insight, Paul! Now, I have a question: Why me? I have my own mortgage, thanks very much. Why do I have to be on the hook for someone else’s, too? If a delinquent borrower, through bad luck or bad judgment, finds himself unable to meet a loan agreement that he freely entered into, let him go through the same thing that generations of defaulted borrowers before him have: foreclosure. No one’s being thrown in jail or being forced to listen to Justin Beiber. You borrowed money from a bank, with your house as collateral. You can’t repay your loan. The bank gets your house. It’s time to move on. Literally.

Do I sound too hard-hearted? Well, if you’re asking me to help finance an alternative transaction—a loan mod—I have a right to, don’t I? And, anyway, for all the sad-sackery we’ve had to listen for the past three years about the tragedy of families losing their homes as a result of the housing blowup, what, really, is so bad about foreclosure, from a borrower’s perspective?

The typical defaulted borrower is a year-and-a-half behind on his mortgage by the time eviction finally happens—which means that that’s how long he’s been able to live rent-free. On the face of it, that doesn’t sound like a bad deal. And if the property is located in a market that’s depressed economically (which it likely is), the borrower is unchained from it at last, and can pick up and move to somewhere with a better jobs outlook.

Why’s that bad? It’s a hassle, sure, and embarrassing. But life’s full of hassles and embarrassments. But foreclosure is also a fresh start, and one that solves both the borrower’s and the bank’s problem the most economical way possible. Why do I (and the bank) have to foot the bill for an alternative—especially since the odds are overwhelming that borrower will go ahead a default on the modified loan, too?

Washington’s fetishisation of loan modifications as a cure-all for the housing bust is idiotic. If the housing bubble and crash taught us anything, it’s that home ownership is not a right. Defaulted borrowers don’t deserve extraordinary taxpayer- (or lender-) financed measures that will allow them to stay in their homes. They deserve to be foreclosed on. Let the cycle take its course, and leave my wallet out of it.