Tuesday, September 8, 2009

Loan Modification Not A Fix-All To Credit Crisis

With credit markets still tight, should the government be doing more to loosen lending? One proposed solution that the government is actively pursuing is loan modification for troubled homeowners. But according to the following post from Blown Mortgage, loan modifications will not get to the heart of the US credit problems.

Last year we say yet another bubble pop, the credit industry. That bubble did not pop alone. A whole lot of burst bubble followed including the mortgage industry, construction, stock market and the banking industry as a whole. Countries do start to get nervous when the banking and credit industry that feeds the whole economy starts to shake. Nerves can help us to react and find solutions but it can also make us overreact and come up with inadequate solutions.

How should we rate loan modifications as a solution for the credit crisis?
The answer to that question depends on who you listen to or which economic model you choose to follow.

If you view the economy as a natural process of offer and demand that is best left alone you will probably think that the government’s efforts to bailout home owners is a travesty of governments role in society. I can easily relate to this view. The credit crisis can easily be viewed as an example of consumer’s greed that can be solved by allowing foreclosures and bankruptcies to do their job of balancing the irregularities unwise “investors and borrowers” created.

Deciding if loan modifications as a management tool of the economy is morally or economically acceptable is only part of the issue. Many would say that loan modifications might help if we were dealing with a mortgage crisis but are not the solution to the credit crisis. It is easy to see that something more deeply ingrained than a bad interest rate is behind the credit crisis we are currently living.

Unfortunately the only thing a loan modification can do is modify a mortgage or home loan it can’t help with numerous credit card debts, car loans and other debt issues.

Many would argue is that the current crisis is the market’s way of teaching a lesson of modifying behaviors, of showing that the current spending and borrowing cultures are not sustainable. An interesting fact that backs this view is that many people who are struggling to pay their mortgage shouldn’t be if one were to look at their incomes. This was a problem the HAMP (Home Affordable Mortgage Program), the Government’s mortgage aid program had to deal with. In an effort to reduce bailouts and loan modification breaks to those who really need it, only home owners that pay more than 31% of their wage towards their mortgage qualified for a sponsored loan modification. HAMP managers have since realized that this requirement limits this program to many who really need a loan modification in order to not foreclose their mortgages. This is because their mortgage is only one of the debts they have to deal with.

For people to reap lasting benefits from a government program we will have to dig deeper into the origins of the current credit crisis and that is not secluded to the type of mortgage home owners have.

This post has been republished from Blown Mortgage, a mortgage news and analysis site.

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