Monday, December 15, 2008

Will Today Live in Infamy?

Today the Streamlined Modification Program, sponsored by Freddie Mac, Fannie Mae, and other federal agencies, goes into effect. It modifies mortgages so that the monthly payments are no more than 38% of borrower income. In other words, borrowers with more income have to pay more; borrowers with less income have to pay less. Indeed, a borrower that is able to earn $1000 extra on his own may, as a result of earning it, ultimately add more than $1000 to his mortgage payments.

This is a sure-fire recipe for removing the incentives for people to work and earn income and thus an effective way to REDUCE employment in the economy.

Until recently, the agencies and a number of banks were modifying mortgages for delinquent borrowers (about 10 percent of mortgages are either delinquent or in foreclosure). "Fannie Mae announced [last] week that homeowners who make their mortgage payments on time but who are struggling financially will be eligible for mortgage modification." (quote from USA today, referring to a December 8 Fannie Mae announcement). This WIDELY expands eligibility and thereby widely expands the reach of these awful incentives.

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