Servicers can receive an up-front payment of $1,000 for each eligible loan modification that meets certain criteria. The government said it would pay servicers $500 and mortgage investors $1,500 if at-risk loans are modified before borrowers fall behind. The government said it would also help pay down the principal of certain mortgages by up to $1,000 a year for up to five years if the borrower doesn't miss any payments.
Hmmm. Loan servicers already have an incentive to rework loans that would otherwise go into default, and for the most part they aren't doing it. Will a couple thousand dollars change their internal calculus? Offhand, it doesn't sound like enough to really make a difference — though another provision of Obama's plan adds a stick to the carrot, by allowing bankruptcy judges to unilaterally alter mortgage terms. So it's possible that the carrot and the stick together will have a noticeable impact.
The second major part of the program is aimed at lowering interest rates on underwater loans:
Finance companies cannot currently refinance a loan if the homeowner owes more than 80 percent of the home's value. But under the plan, Fannie and Freddie — which were taken over by the government last year — would be able to refinance a mortgage if it does not exceed 105 percent of the current value of the property. For example, if the value of the borrower's property is $200,000, but the homeowner owes $210,000, he or she could still qualify for the program.
This sounds promising. If the interest rate reductions are significant, it could provide some serious help to homeowners. It will also help arrest the slide in home prices, which might be a worthwhile goal at this point. It's true that house prices are still too high and need to fall further, but Obama's program most likely won't have a serious effect for another six months at least, and by that time we might be at risk of house prices overshooting on their way down. A program that pushes against that tide could end up being a good countercyclical tool.