Freddie/Fannie Mortgage Modifications

There are at least three serious issues with the Freddie/Fannie mortgage modification programs. First, they are fundamentally offensive to anyone who bought a house with a reasonable amount of money down, some conscientiousness about the price paid, and the cash flow to support it. Granted, sometimes you have to hold your nose and go along with such things if a credible case that the alternative is worse – i.e., mass defaults – but that doesn’t make it materially less offensive.

Second, unless I missed something, the mortgage mods didn’t actually, you know, modify the most vexing part of the mortgages. Interest can be lower, but principle will be repaid at the end of the loan? What the f**k does that do that’s useful for people who owe more on their mortgages than their houses are worth? Those are most of the people walking away right now. Simply being able to (currently) muster the cash flow to hang in doesn’t make it materially less likely that many people won’t walk away from their home.

Third, the 38% debt to income cap is, in a word, high. Sure, it’s better than being really, really high, as is the case when you made no down payment on a mortgage that has now reset, but that’s sort of beside the point, isn’t it? These are still people highly levered to fixed payments in an environment where their incomes stand a greater chance of declining than increasing over the next twelve months.

Maybe I’m wrong, but I think we’re setting the stage for mass judicial review/rewriting of many U.S. mortgages early in 2009. This plan doesn’t strikes me as if it will stick.