I heard a great interview on NPR radio yesterday. It was with another financial blogger with some common sense, Barry Ritholtz. Barry also recently released the book Bailout Nation, where he offers one of the clearest looks at the financial lenders, regulators, and politicians responsible for the financial crisis of 2008. In the interview, Ritholtz talks about the government sponsored loan modification programs, essentially calling them out for doing very little to help the homeowner, and an awful lot to help the banks. (Seems like we’ve heard that somewhere before… hmmmm)
The main point of the interview, it that by artificially propping up real estate prices, you’re hurting the economy as a whole, and even if by doing so you do help the people who either bought more home than they could afford or the people with equity in their homes who would be hurt by dropping real estate prices, at the end of the day you’re ignoring the real problem – namely that the “equity” that was created during the housing boom was largely fictional anyway. With that in mind, the only way to truly fix this problem is to let housing prices get back normal, and that will only happen through defaults, principal reductions and short sales.
By promoting all these loan modification programs the government is basically allowing the banks to do whatever they want at the homeowner and taxpayer’s expense. Even those who get modifications will many times default anyway, either due to the fact that their homes are still grossly underwater in most cases, or due to the fact that they can’t make the new payment because of a change of financial situation. Whatever the case, we can say for certain that so far any government sponsored loan modification programs have been very expensive and have far undelivered given the results promised. Unfortunately, it seems that since our government refuses to listen to the lessons of the past, we’re going to be doomed to repeat them. As Mr. Ritholtz so plainly put it…
“There are a lot more effective ways to spend $14 billion than essentially rewarding the banks that were just so reckless and irresponsible. It just doesn’t make any sense.”