We now return you to Crisis Watch 2008: loan modification edition

"Determining what a homeowner can afford."

This is nothing more than institutionalized socialism. The thing is that you either 1) modify 2) kick people out of the homes and watch prices fall anyways or 3) increase salaries at a pace ahead of inflation.

There are no other options.

talk about stating the obvious - I mean, of course "modifications" that are designed solely to allow the mortgage holder to recover 100% of their investment (and then some) are doomed to fail.

The people who sold the paper, and the ones who bought and sold derivatives based on that paper, are the ones that should take the biggest hits -- foreclosure rules have to be changed to give most, or all, of the homebuyers equity in a house to the homebuyer, and when the house is sold at auction, that equity can be used as part of a "downpayment" on a prime rate mortgage which will be based on the homeowners total debt load and income (rather than their credit rating, which often has little or nothing to do with their creditworthiness.)

Let the market decide, but don't penalize "little people" who made the mistake of believing what they had been told by the media and the mortgage industry.

(BTW, as someone who writes for Time, are you aware that up until this crisis hit, a very big chunk of Time.com's ad revenue was from people offering sub-sub-prime loans? )

Finally, this crisis was not a result of the housing bubble. It was the result of the derivatives market -- the "housing sector" itself was doing a decent job absording the losses arising from increased defaults -- it was the collapse of the derivatives market (which was based on selling "traches" that included "high return" paper backed by the "last 20%" of the value of a foreclosed home). Increased foreclosures eliminated the market for such paper.

When that market collapsed, it lead to the collapse of the "bundled mortgage securities" market, because the people who created the derivatives had to dump their securities to raise cash to cover their obligations. Before the crisis the value of the "bundled mortgage" paper was declining in an orderly fashion, based on the value of its underlying assets. But when the derivatives people started flooding the market with the bundled mortgage securities they held, there was a excess of supply of those securities and the prices on those securities went way down, forcing institutional investor to take huge "on paper" losses because of "mark to market" principles.

Absent the derivatives market, the "housing bubble" could have been (and WAS BEING) deflated without the threat of a global financial collapse. The housing bubble was a "problem", but it wasn't the cause of the crisis.

@Barbara: One still remains utterly flabbergasted at the fact that the original mortgage didn't take into account what the applicant could afford to pay.

"....determining what a homeowner can afford based on documented income.”

Jeez, what will those financial-types think of next?

"....determining what a homeowner can afford based on documented income.”

Jeez, what will those financial-types think of next?

@Barbara: One still remains utterly flabbergasted at the fact that the original mortgage didn't take into account what the applicant could afford to pay.

That's because originators only needed to put the defaults off for 90-180 days to get the loans sold off because loans typically had a 90-180 warranty on them from the originator. If the loan didn't go into default in that time frame the originator doesn't have to take the loan back. It's pretty easy to structure a home loan that will be affordable for 180 days but unaffordable over the life of the loan.

[...] course, loyal readers know that I am slightly suspicious about the long-term sustainability of mass modifications. But maybe we should take this one step at [...]