Another View About Mortgage Loan Modification

Bill Schmick, writing on www.iberkshires.com makes an interesting argument that mortgage loan modifications may be doing little more than postponing inevitable foreclosures and exacerbating the mortgage crisis. He sees the real problem being lenders' refusal to agree to principal reductions.

Plans whereby lenders reduce payment amounts for a period of time or tack missed payments onto the end of the loan may not be helpful because the borrowers have a reduced amount of time to pay back the loan after the reduced payment period has lapsed. Also, everyone involved, is betting that housing prices will rebound to a higher price than the borrower originally paid for the house.

Half of the modified loans eventually go back into default.

Finally, the National Association for the Self-Employed (NASE) estimates that 1,279,800 small-business owners have missed one to three mortgage payments by mid-November of last year. That was before a wave of resets on their mortgages was about to begin in the fourth quarter of 2008. At the same time, the economy has taken a nosedive that has really walloped the small-business owner.

When a small business fails, it affects not only the business owner but the 5-20 employees who lose their jobs. Since small business is the engine that powers our economic growth, a crisis in that part of the economy could greatly eclipse the damage caused by the subprime crisis.