View From the Top, Pt I – “I can see my house from here!”

In February of 2009, the Obama administration rolled out its Making Home Affordable mortgage relief program. Its aim was to help check the foreclosure spiral by providing lower rates and longer repayment periods to those who qualified. But last week the Treasury Department reported that nearly half—about 630,000—of the homeowners who took advantage of the program have let their modified loans go delinquent.

This statistic alone, by any reasonable way of looking at it, would deem the program a bust. But there’s more.

As of the middle of the second quarter, less than $500 million of the allotted $75 billion had been used. Says Mark Zandi of Moody’s Analytics, “The government program as currently structured is petering out. It is taking in fewer homeowners, more are dropping out and fewer people are ending up in permanent modifications.” And this is happening when foreclosures / short sales are projected to top 1 million in 2010 and 1.5 million in 2011 (there were about 900,000 in 2009).

So why is the program not working? Why are people not stampeding to get in on what amounts to free money?

1. It’s not actually helpful. In fact, it’s highly bureaucratic. The hoops and paperwork of foreclosure or bankruptcy might actually be preferable.

2. They don’t want the help – walking away is easier. After all, everyone else is doing it, and they’re all still ok, driving the same cars, eating the same food. So why bother with the hassle?

3. Lenders aren’t cooperating—they’re still insisting on not throwing good money after bad. The lender is just as a self-interested as the borrower. We can hardly expect them to act contrary to their own natures, right?

4. Those who are falling out really should not be in their loans no matter how radically it gets modified. And behavior eventually proves this point.

But of course, this is all easy to figure out in hindsight. It’s not like anyone actually predicted this would happen. Actually, everyone close to the action thought it would happen just about like this. It was only those at the top who couldn’t see it.