We Own You And You're Going To Do What We Say

Another string attached to the TARP money, and it's a good one:

As President Obama rolls out his $75 billion aid program to stem the tide of foreclosures among cash-strapped Americans, one key point should be emphasized: Banks participating in the government's $700 billion financial bailout are required to help modify home loans, according to the administration.

"[W]e have guidance as part of [the Troubled Assets Relief Program] that anyone receiving TARP funding must participate in this program," Housing and Urban Development Secretary Shaun Donovan told reporters today.

This is a big stick that will be attached to the carrots and incentives to get lenders together with homeowners to modify loans, the biggest one being that it costs more to let a house slip into foreclosure than to modify the loan. That doesn't mean it will definitely work. Loan modification is a tricky business, especially with all the fees tacked on.

When her brother could no longer help support her, Luzetta Reeves asked her small mortgage company to cut her monthly payments. It did — by 11 percent — making it possible for her to afford her house here on her modest fixed income.

Luzetta Reeves was able to remain in her home by modifying her mortgage, which cut her interest rate to 5.6 percent from 8.9.
In Miami, Jeffrey Mitchell saw his family income drop just as real estate taxes and insurance premiums increased, making his monthly mortgage payments crushing. He got a lower interest rate, too. But with the added fees and penalties, his monthly payment remained the same. He is now back in foreclosure [...]

The nation’s 14 largest banks reported that more than half of the loans they modified last year were delinquent again after just six months, according to the federal bank regulator, the comptroller of the currency. But several small mortgage companies like the one that helped Ms. Reeves, which have been pursuing modifications longer, say that less than 25 percent of their modified loans became delinquent again.

“It’s becoming more and more clear to us that if you do real modifications the default rate is significantly lower,” said Tom Miller, the attorney general of Iowa, who has led a group of state officials pushing the industry to modify more loans. “They shouldn’t be called modifications if people pay more or approximately the same.”

They have to cut principal, not just interest rates. Otherwise we'll be back here in 6 months. I think the Obama plan can work, but it's going to take some sharp work.