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Boston Fed: Obama Loan Program Unlikely To Work

July 7th, 2009

A study released by the Federal Reserve Bank of Boston this week indicates that the $75 billion that the Obama administration is directing to the lending industry to encourage loan modifications probably won't work.

The four-month-old anti-foreclosure program has -- at least so far -- shown weak results. According to the Obama administration's own estimate, "over 50,000" loans were modified to make payments more affordable for borrowers at risk of default, The New York Times reported. That's a small number considering that millions of new foreclosures are expected in the next couple years.

Paul S. Willen, senior economist at the Boston Fed, told The Boston Globe that it would probably make more sense to give the money directly to struggling homeowners to cover their payments because lenders aren't eager to do loan workouts because they aren't profitable.

The Obama plan would give bonuses and other incentives to loan servicers to modify loans ($1,000 for each loan they modify and $1,000 each year that a borrower says current on their modified loan payments).

According to The Globe:

Willen said the success bonus could have the unintended effect of steering loan servicers away from those who need help the most, and toward only those borrowers most likely to recover on their own anyway. He said that if modifications increase, it won’t be by much. “My guess is they are going to help people who are OK, and they are not going to help people who are deep trouble,’’ he said.

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