Should modifications e-equify borrowers?
A number of recent commentators have called for a big change in government policy on mortgage modifications. Currently, the government’s Home Affordable Modification Program (HAMP) pays cash incentives to servicers who reduce monthly mortgage payments to no more than 31 percent of the borrower’s income. Most of the time, this reduction is accomplished by reducing the interest rate or by extending the loan term for up to 40 years. Modifications that forgive loan principal are rare. And therein lies the problem, according to HAMP critics, who point to the strong empirical relationship between negative home equity and default. On the national level, the U.S. foreclosure rate started rising in 2006, the same time that house prices began to fall and negative equity began to emerge. Also, in loan-level data, borrowers who are “underwater” on their mortgages default far more often than owners with positive home equity. Many of HAMP’s critics argue that mortgage modifications will not work unl
