Get It In Writing

Despite some slightly better housing news in the past few months, the threat of foreclosure still hangs over the head over a record number of Americans, and this shock to the economy still threatens recovery. One thing is clear - the modification programs attempted over the past year haven't worked at all. In fact, banks would rather foreclose than unentangle the maze of who owns the mortgage and how to legally alter the terms.

Government initiatives to stem the country's mounting foreclosures are hampered because banks and other lenders in many cases have more financial incentive to let borrowers lose their homes than to work out settlements, some economists have concluded.

Policymakers often say it's a good deal for lenders to cut borrowers a break on mortgage payments to keep them in their homes. But, according to researchers and industry experts, foreclosing can be more profitable.

The problem is that modifying mortgages is profitable to banks for only one set of distressed borrowers, while lenders are actually dealing with three very different types. Modification makes economic sense for a bank or other lender only if the borrower can't sustain payments without it yet will be able to keep up with new, more modest terms.

A second set are those who are likely to fall behind on their payments again even after receiving a modified loan and are likely to lose their homes one way or another. Lenders don't want to help these borrowers because waiting to foreclose can be costly.

Finally, there are those delinquent borrowers who can somehow, even at great sacrifice, catch up without a modification. Lenders have little financial incentive to help them.

Because it's in the banks' economic self-interest to foreclose, the plans brought forth by the government to avert foreclosures haven't had much of an effect. Banks are using all sorts of tricks and schemes, to delay modification almost endlessly and raise questions about who qualifies. So today, the President met with mortgage lenders and struck yet another handshake deal.

The Obama administration, scrambling to get its main housing initiative on track, extracted a pledge from 25 mortgage company executives to improve their efforts to assist borrowers in danger of foreclosure.

In an all-day series of meetings Tuesday at the Treasury Department, government officials reached a verbal agreement with the executives for a new goal of about 500,000 loan modifications by Nov. 1 and stressed the program's urgency.

The sessions came amid concerns that the Obama administration will fall far short of its original goal of helping up to 3 million to 4 million troubled borrowers with modified loans.

The bottom line is that voluntary deals with the lending industry or practically any company in finance will not work. They've been deliberately dragging their feet on offering modified loans because they have every incentive not to do it. I don't know how many different housing bills you can enact without teeth and expect some different result. The Administration is acting like they have no authority on this front. And until they demand formal agreements instead of assurances, they'll be trampled upon over and over again.