Can Loan Modifications Fix the Housing Crisis?

by admin on March 3, 2009

The inclement weather today on the East Coast cancelled the lawmaker discussion on bankruptcy judges and the power they would have to make loan modifications during bankruptcy. Meanwhile the stock market is cratering to levels not seen since 1997. The DOW is now below 6,800 as people everywhere are coming to grips with the fact that this recession will be protracted and very painful. Obama announced his Foreclosure Prevention Program over 10 days ago when the Dow was close to 8,000, since then it’s been straight down as the market digests one piece of bad news after another.

The first heavy dose of bad news was that the economy contracted at 6.4% in the 4th quarter of last year – very painful and a rate that would make a recovery in the housing or stock market seem unlikely in 2009. New jobless claims are hitting record highs every week and if you watch the news you can see plenty of anecdotal evidence that things are getting bad – look no further than the long lines when a new job is announced.

The housing market is no better, December housing starts were at the lowest level in over 20 years and the pace of foreclosures continues to accelerate. The details of Obama’s plan are still scheduled to be released this Thursday March 4th, but with the delays in the US House, there’s a good chance this release date gets pushed back a week or two. So the question is: Can Loan Modifications Fix our Current Housing Crisis?

From everything I know so far this new Foreclosure Prevention Program is probably not going to be enough. With job losses accelerating at a rapid rate, the real question is that even with reduced monthly payments are people going to be able to afford their mortgage payment? Without some focus on job creation, the economic mess we’re in will not be fixed by reducing payments – it will only come about by creating work. How can we create jobs? For one thing, increasing taxes is the last thing that should be considered right now. Higher taxes are not going to give incentives to small businesses and people that can use their hard work and effort to create something of value.

When it comes to taxation – we are famous for taxing alcohol and tobacco and time and again it’s been show that higher tax levels lead to less people using those things. Now when it comes to job growth, Obama is talking about raising taxes on businesses – exactly the place where we’d expect job creation to come from, yet we’re disincentivizing that activity. It’s a dangerous game that we’re playing and if we’re not careful this recession could quickly become a depression.

In the short term, loan mods might be a stop gap approach to homeowners who are struggling under a mountain of debt. However, unless we start focusing on job creation and growth it won’t matter how many loan mods are done, our economy will continue to sputter along and our recession could last for years.

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