U.S. Legislation: Foreclosure Relief Economy Essay

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But Morgenson suggests even more troublingly, that the fundamental assumption of affordability behind the new program is flawed: "in devising what it considers an affordable mortgage payment, the program doesn't account for all of a borrower's debts -- the first mortgage, second lien, credit card debt and automobile payments. Instead, it calculates affordability using only the borrower's first mortgage payment, insurance and property taxes" (Morgenson 2009).

The program may even hurt those borrowers with second liens: "These banks -- the very same companies the Treasury is urging to modify loans that they service -- have zero interest in writing down second liens they hold because it would mean further damage to their balance sheets. Say a troubled borrower has a first mortgage owned by a pension fund in a securitization trust and a second lien held by the bank that services the loans. The servicer is happy to modify the first mortgage under the Treasury program because the pension fund holding that loan takes the biggest hit while the second lien is untouched" (Morgenson 2009).

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Morgenson's argument that the banks are being given the wrong incentives by the current program is difficult to quibble with. However, her moral outrage that banks were bailed out, but homeowners were not refuses to answer the equally troubling question: should these individuals with second liens be staying in homes they can ill afford? While the current program seems ineffective, what should the goal of future legislation be: to keep as many people in their homes, or to target those homeowners who have a substantial change of being able to make regular mortgage payments, once they become more financially solvent? Consumers with substantial debt, even if they can renegotiate a new mortgage, may not be helped in the long-term by even a more aggressive government program.

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