In the short-term, I think the answer is no. As I argued in my column last week, the plan does fairly elegantly snatch some low-hanging fruit. But the problem is that there’s just not enough fruit on the low branches to really get at the problem.
In the week or so since I’ve written the column, I’ve become more convinced that it’s just not going to get the job done. Originally I had a graf in the column that said, more or less, that a useful way to think about the mortage problem is as an interest problem and a principal problem. That is, on the one hand the rates people are paying are too high, thanks to teaser rates, ARM’s, fees, etc…, and on the other the prices of their homes are just over-valued. Alyssa Katz, explains just what this means in terms of the plan’s shortcomings:
For many borrowers, a lower payment will be all the difference between staying in one’s home and going into foreclosure — for now. But the Obama plan is a short-term fix. It doesn’t do the one thing that would actually help homeowners in the long haul, and that is reduce the amount of principal they owe. The loan mods that these brokers are selling, and that the Obama administration is now promoting, are new and improved variations on the exotic mortgages that seduce borrowers in the first place. They charge a manageable amount now, and then hit the borrower with higher costs down the road.
“Loan modification success rates are ridiculously low,” agrees Debra Zimmerman, an attorney with Bet Tzedek Legal Services in Los Angeles who represents borrowers. “Until banks are ordered to reduce principal too, there will be no solution.”