Is This the Solution to the Housing Problem?

"Here is how the government aims to solve the housing crisis: "The FDIC's program, which is underway at failed lender IndyMac, calls for making monthly payments more affordable by reducing interest rates, lengthening loan terms or deferring principal. Servicers aim to reduce payments to no more than 31% of a borrower's monthly income. So far, more than 10,000 delinquent loans have been modified, and offers have been made to another 20,000 borrowers."

So, the plan is to reduce the payments on the mortgage while keeping the amount of the mortgage the same?

That's nuts! Why would anyone commit to continue paying on a mortgage that is substantially greater than the value of their property ? Already, 20% (33% in May, 2009) of all mortgaged homes are underwater, worth less than the mortgage on it and that number will increase as home prices continue to plummet.

Talk about Moral Hazzard! Once homeowners realize that home prices are not coming back in their lifetimes, and that they have bailed out the banks but they are still stuch paying their losses, that strange music you hear will be Jingle Mail, the sound of keys being sent back to the banks in bunches!

There is only one realistic way to solve the homeonwer's dilemma, the same way it was done in the First Great Depression. Buy up the unaffordable mortgages at the value of 80% of the current market value of the home and refinance at that Loan to Value, in a fixed, 30 year loan at maybe 6% interest.

This will provide the debt relief and the payment relief that home owners need to be able to afford their homes and have money left for other bills.

I do not want to hear that the bank's will be taking a loss when the same homeowners have already poured Trillions of dollars into the banks as bailout funds and loan guarantees. What it will do is to stop the steady erosion of the bank assets that will continue as long as the mortgage problem is not solved, leading to further deterioration of the bank's assets which will prevent them from lending which will starve the economy of the funds it needs to operate.