Friday, June 12, 2009

Mortgage Modification has an Asset Test Too?

Jack Guttentag has a wide audience whom he helps squeeze the maximum out of mortgage lenders. I appreciate him because he helps refute the "borrowers don't know how to exploit incentives" objection to my theory that mortgage modification is bad for the economy.

Today I appreciate him for another reason: he explains how mortgage modification not only discourages people from working, but also discourages them from saving:

"To be eligible to have your payment reduced under [government's Home Affordability Modification Program], you must document not only that your income is insufficient to meet the payment but also that you do not have "sufficient liquid assets" to make the payment. I have scrutinized the specs for this program issued by Treasury, and could not find a definition of either "sufficient" or "liquid assets." It is a thorny issue that Treasury elected not to deal with. In effect, this leaves it up to the servicers to decide, raising the prospect of widely divergent approaches.

...My guess is that few if any borrowers are going to get caught by the "sufficient liquid assets" rule."

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