Should the Government Subsidize Mortgage Modifications?

Should the government be bribing mortgage servicers to modify loans and reduce payments?

Under the current housing plan, the federal government pays for one-half of the cost when lenders reduce mortgage payments to 31 percent of borrower income from 38 percent. When this plan was revealed, I was relieved because it seemed so much more reasonable than some of the extreme solutions being peddled, but a new paper by three Federal Reserve economists and a co-author has led me to reconsider my views.

There are two popular rationales for government action to increase mortgage modifications. One argument for supporting loan modifications is that foreclosures are bad for society, perhaps because they tear neighborhoods apart, and that the government should do all it can to reduce foreclosures. A second argument is that the securitization of mortgages broke the loan renegotiation process, and the government needs to fix the problem. The new Federal Reserve paper doesn’t address the first rationale for intervention, but it does leave the second argument in intellectual tatters.

Read more from the New York Times

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