Boston Fed: Obama Loan Program Unlikely To Work

Posted by: Prashant Gopal on July 7, 2009

A study released by the Federal Reserve Bank of Boston this week indicates that the $75 billion that the Obama administration is directing to the lending industry to encourage loan modifications probably won’t work.

The four-month-old anti-foreclosure program has — at least so far — shown weak results. According to the Obama administration’s own estimate, “over 50,000” loans were modified to make payments more affordable for borrowers at risk of default, The New York Times reported. That’s a small number considering that millions of new foreclosures are expected in the next couple years.

Paul S. Willen, senior economist at the Boston Fed, told The Boston Globe that it would probably make more sense to give the money directly to struggling homeowners to cover their payments because lenders aren’t eager to do loan workouts because they aren’t profitable.

The Obama plan would give bonuses and other incentives to loan servicers to modify loans ($1,000 for each loan they modify and $1,000 each year that a borrower says current on their modified loan payments).

According to The Globe:

Willen said the success bonus could have the unintended effect of steering loan servicers away from those who need help the most, and toward only those borrowers most likely to recover on their own anyway. He said that if modifications increase, it won’t be by much. “My guess is they are going to help people who are OK, and they are not going to help people who are deep trouble,’’ he said.

Reader Comments

PAC

July 8, 2009 2:09 PM

Re: Stimulating the economy.

When citizens have confidence they will spend money. They must be comfortable that their jobs will not be eliminated in a few months. No one will buy a car even at the best discount if they are unsure of their job status. Confidence must be restored and it can be done using a simple formula.
Each household that voted in the last election should be awarded $10,000. tax free. This amounts to about one trillion dollars for about one-hundred million households.
Some would spend it on cars, (auto industry)
some on home improvement, (Construction and building)
some on vacations, (travel)
some on hookers, (entertainment and hotel)
some on paying down credit card debt, (banking)
some would create bank savings account (making cash available for borrowers)
some would gamble it away in Vegas, (gaming)
some would donate to charity, (life style)
many would spend it in the restaurants and the mall (retail)
and all of this will require more building, roads, accessories, hospitality clerks, bankers, etc, etc. Then the shovel-ready jobs will evolve naturally from these economic events.
It is just that simple.

Mabeldenton

July 10, 2009 1:50 AM

I own a condo and have an outstanding balance of $140k, consisting of $104k primary and $36k secondary. I took the home equity to consolidate debts. At the time the property was valued at $163k but now it is valued at $134k. I'm looking to sell because i am engaged and will be moving into my fiancee's home. Check http://obamamortgage2009.blogspot.com/2009/03/obamas-mortgage-modification-do-you.html If I have a buyer who offers me within say $5-7k of the outstanding, can i agree to assume a loan on the residual and pay the bank the difference over time with interest? The same bank holds both mortgages.

Mabeldenton

July 10, 2009 2:28 AM

This whole stimulus package is just part of the governments long term plan to take away the power of the people. Are we going to do something about it or be lazy and think someone else is going to do it for us? It is time for a revolution. We need to overthrow the government and take our power back. Before there is nothing we can do about it.. you should check http://obamamortgage2009.blogspot.com/2009/03/obamas-mortgage-modification-do-you.html#comments

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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