“New York Times” article got it right - Loan Modification is not the Answer, Foreclosure is

A January 2nd article in the "New York Times" by Peter S.Goodman got it right by essentially stating that the Federal Government's Making Home Affordable program has been largely ineffective and likely is causing more harm than good.
The article, U.S. loan Effort is Seen as Adding Housing Woes, covers a lot of ground but several of the main points brought by the sources referenced in the article are: 1) The Program has hurt an economic recovery by stalling the eventual outcome - foreclosure -- as most homeowners in foreclosure cannot make or choose not to make even a reduced monthly payment, and 2) the modifications along with the high re-default rate give homeowners the false sense in the short term that they can keep their home only to ultimately loose it to foreclosure.
By some estimates, the leading cause of loan default is not mortgage payment affordability but strategic in nature. Simply stated, the borrower understands that they owe, often by a large margin, more than the home is worth. He or she then decides the best course of action is to stop paying the loan as it would take many years to recover the lost equity. For example, a home purchased for $200,000 in 2006 and worth $100,000 today, a common scenario in Florida, will take almost 15 years at an average annual appreciation of 5% to be worth $200,000 again. I know of examples whereby a borrower buys a comparable home for half of what he owes and then stops making payments on the original home, thus securing the new home prior to taking the credit rating hit.
The government's efforts, via directives to the lenders, to modify loans is akin to putting a band aid on a broken arm in most instances. At some point, the arm will need to be reset and cast to ensure proper healing. Foreclosure, while painful in the short term, allows the lender to recover a portion of its loan loss and relend the money to a presumably higher credit quality borrower and put the home into the hands of someone more likely to be able to afford and maintain it, thus addressing the negative influence on the neighborhood of a poorly maintained home. Foreclosure is a necessary healing process.
Jim Banford