Las Vegas has borne the brunt of the housing crash, with plummeting home values and a spike in foreclosures.
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The tricky part is figuring out who will meet their modified payments and who will simply fall behind again. The relapse rate can be quite high, meaning that we'd be spending money only to delay the inevitable. Part of what drives up the redefault rate, though, are changes that don't lower, or may even increase, a borrower's monthly payments. A lender that re-amortizes missed payments over the life of the loan might see doing so as a compromise--but that doesn't mean the mortgage becomes more affordable. That's why the FDIC insists that modifications reduce payments at least 10% and take up no more than 38% of a borrower's gross income.
Again, though, let's not hail a solution as the solution. A targeted tool like loan modification is probably a more useful allocation of resources than a blanket policy like cheaper mortgages. Since half of all repossessed-home sales are in just four states (California, Michigan, Ohio and Florida), we can focus efforts there.
Make Some Owners Renters
Yet no policy can change the fact that both property prices and home-ownership rates went off the charts. It is natural for them to come down. "We brought in a class of buyers that shouldn't be in homes at all because they don't have the income," says Edward Leamer, professor of economics at UCLA. "We have to figure out what to do with these folks." There have been ideas on how to return owners to the rent rolls. Last year, for example, Arizona Congressman Raúl Grijalva proposed changing foreclosure rules to let homeowners petition a judge to let them remain where they are as renters for a defined period.
Now, maybe that's not the exact mechanism we want. But by and large, policymakers are reluctant to "take away" people's homes. And that's a problem in itself. Here we're up against macroeconomic forces bigger than we are. There's something to be said for trying to influence where housing is headed--but there may be greater benefit in understanding that it will be a long road to recovery. And the most effective thing we can do is make it less painful for people along the way.