Treasury Admits Mortgage Modification Programs Are Really Designed To Help Banks

by has posted an article how the difficulties of the government instigated mortgage assistance programs were designed to help banks “earn their way back to health.” Only a small percentage of homeowners are eligible to receive any assistance, and out of those, very few get any “meaningful assistance.” The overall idea of the programs is to lower homeowners’ monthly mortgage payments, but doesn’t reduce the overall burden.

Often, the burden on homeowners increases because money, that the homeowners could have otherwise saved, is funneled to help bail out banks. The Treasury has recently admitted that all the elaborate mortgage assistance programs were designed to “pump money into big banks and shield them from losses on bad loans”… and at all about helping homeowners. The Treasury’s only “serious” program to help ordinary people is really just a sham to help megabanks.

Zach Carter, author of the article, says that:

Treasury Secretary Timothy Geithner has long made it clear his financial repair plan was based on allowing large banks to “earn” their way back to health. By creating conditions where banks could make easy profits, Getithner and top officials at the Federal Reserve hoped to limit the amount of money taxpayers would have to directly inject into the banks. This was never the best strategy for fixing the financial sector, but it wasn’t outright predation, either. But now the Treasury Department is making explicit that it was-and remains-willing to let those so-called “earnings” come directly at the expense of people hit hardest by the recession: struggling borrowers trying to stay in their homes.

The program was successful in the sense that it kept the patient alive until it had begun to heal. And the patient of this metaphor was not a struggling homeowner, but the financial system, a.k.a. the banks. Policymakers openly judged HAMP to be a qualified success because it helped banks muddle through what might have been a fatal shock. I believe these policymakers conflate, in full sincerity, incumbent financial institutions with “the system,” “the economy,” and “ordinary Americans.”

Here’s a rundown of how the Home Affordability Modification Program (HAMP) really works. Homeowners experiencing hard times can apply for relief on monthly mortgage payments through their banks. The banks who have agreed to participate in HAMP have also agreed to do several things to reduce homeowners’ monthly mortgage payments, such as lowering interest rates or extending the loan’s term. And the bank gets the big benefits because it gets to continue collecting payments on a loan that it otherwise might have lost.

Homeowners don’t benefit so much in the long run. Banks only reduce monthly payments, not how much is actually owed. If a homeowner owes more money than their home is worth, it just means that they’ll be making payments longer than they were before. Most people get into the program and expect real relief and/or assistance from their mortgage payment. After the three month trial period, homeowners realize the program doesn’t really help them and they (understandably) quit.

These borrowers would have been much better off simply finding a new place to rent without going through the HAMP rigamarole. This example is a good case, one where the bank doesn’t jack up the borrower’s long-term debt burden in exchange for lowering monthly payments.

When a bank agrees to adjust a mortgage payment, they take an upfront loss, but that loss is still a lot less than if the property had been foreclosed on.

If, say, Wells Fargo had taken a $20 billion hit on its mortgage book in February 2009, it very well could have failed. But losing a few billion dollars here and there over the course of three or four years means that Wells Fargo can stay in business and keep paying out bonuses, even if it ultimately sees losses of $25 or $30 billion on its bad loans.

The Treasury is still pushing this program with the ultimate goal of getting homeowners to help giant banks. However, not paying your mortgage can be just as good for the economy -maybe even better- as enrolling in a mortgage assistance program. Think of it this way. Instead of wasting money on modified bank payments that aren’t doing any good, homeowners could spend that money at businesses which would generate revenue and encourage job growth.

If you would like more information on foreclosures, please check out our articles The Three Stages Of Foreclosure In Alabama and Wrongful Foreclosures In Alabama.

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