GSE Loan Modification Plan Generates Questions, Concerns

In the end, HW’s key sources wondered if the program was nothing more than window dressing. “Far too few people are thinking more than one move ahead when it comes to developments such as this,” said one source, a long-time industry observer, under condition of anonymity. “[Servicers are] gonna stop the foreclosure clock on people who are eligible for loan mods. Big whoop.”

Another risk of such large-scale modifications, of course, is that they could incent performing borrowers to default in an effort to secure a lower payment on their own mortgage. But the larger issue, according to analyst Mark Hanson with Field Check Group, is that the modification plans being touted now don’t solve the underlying problem and merely forestalls future defaults.

“The government’s new plan of reducing rates, extending terms and allowing negative amortization is done primarily from keep borrowers from walking and renting by competing with rentals,” he said in comments posted on his blog. “It does not solve the problem that home owners are hopelessly underwater and over-leveraged on their home. They can’t sell or refi.”