Our view on foreclosures: Get out of the business of mortgage modifications

On an emotional level, many Americans have never come to terms with the $700 billion bank bailout that passed in the waning days of the Bush administration. Though it garnered bipartisan support, and the overwhelming view of economists and businesses leaders was that it averted calamity, the idea of propping the very institutions that caused the crisis seemed like a bad use of taxpayer money. How could it be otherwise? So in response, President Obama decided early in his administration to take $50 billion from the bailout funds and redirect it to homeowners. The goal was to induce banks to modify the terms of millions of loans that were in danger of default because of declining home prices. It was always a dubious idea. Bailing out people who, in many cases, bought houses they couldn’t afford isn’t much more appealing than bailing out bankers. And besides, this is bailing out bankers because it’s impossible to help borrowers without helping lenders as well.

Roughly a year after the program was created, and a week after some changes were announced, what is becoming increasingly clear is this: The main part of the bailout is shaping up less as a bailout than a shrewd investment, while the loan modification program looks like an embarrassing failure.

Now that the threat of a second Great Depression is gone, the justification for bailouts of any kind is even more tenuous. And despite improvements, the mortgage program still looks like a sweetheart deal for banks, as well as select homeowners.

Consider this contrast. The main part of the bailout — consisting of direct investments in financial institutions — is quickly being paid back, in some cases at a nice profit. A $25 billion investment in Citigroup, for instance, is worth between $31 billion and $32 billion at Wednesday’s share prices.

The loan modification program, on the other hand, is the only part of the bailout that can’t be described as an investment. Even in the case of the auto bailout, taxpayers will get something back. Not so with this.

The program is actually a mosaic of different parts. It includes money to induce servicers to refinance borrowers into government-backed loans, and in some cases reduce the principle owed on some mortgages. It has a requirement that they reduce the loan payments for three to six months if the borrower loses a job. And it encourages holders of second liens to settle up.

Economically, this makes some sense. The troubled housing market is a major barrier to recovery. And the expansion announced last week could at least put some life into a program that has fallen far short of expectations, with fewer than 200,000 modifications so far.

But from a perspective of fairness and what is best for the economy in the long run, it is hard to defend. Lenders made fortunes putting people in inappropriate loans by reselling them at a profit and collecting fees as a loan servicer. Now they are getting paid to behave as they should have all along.

Giving special deals to certain homeowners is troublesome as well. What about the people who opted against buying at the top of the market? Or those who narrowly missed qualifying for this program? Certainly, they must find the concept unfair.

Given how generous, and narrow, this program is, it’s hard not to agree with them.

 To report corrections and clarifications, contact Standards Editor Brent Jones. For publication consideration in the newspaper, send comments to letters@usatoday.com. Include name, phone number, city and state for verification. To view our corrections, go to corrections.usatoday.com.

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