Mark Zandi: "There was a regulatory failure, and taxpayers have a fiduciary responsibility to make it right"

Mark Zandi thinks we haven't gone far enough bailing out homeowners (emphasis mine)...

The administration and Congress should therefore prepare a plan B. And it must be simple: For example, anyone who got a mortgage from 2005 to 2008 on a home they live in that was inherently unaffordable at origination - their debt-to-income ratio exceeded 31% or the loan was more than 90% of the home's value - qualifies for a loan modification that reduces the principal to the current appraised value of the home. Taxpayers would bear the cost of the principal reductions, appraisals, income verification and other paperwork.

This straightforward approach benefits everyone involved. Since the eligibility criteria are clearly defined, homeowners would not be able to default on purpose to get the modification. And it is fair: If the loan was inherently unaffordable at origination, regulators should never have allowed it in the first place. There was a regulatory failure, and taxpayers have a fiduciary responsibility to make it right. Besides, taxpayers will also benefit as the foreclosure crisis abates, because house prices will stop declining, and that will end the drain on the financial system and broader economy.

I wonder if Mark realizes that pretty much every FHA loan would be eligible for his loan modificaiton.. even ones originated today. I think the failure was at every level regulatory, personal responsibility, fiduciary duty, etc. To single one area out and make that area wholly responsible for the whole mess is a tremendous leap in logic. Each area is shouldering some of the burden.

On the loan modification plan Mark Zand I agree.. it makes little sense for homeowners to get the loan modification as they are currently structured. Most homeowners would be better off starting fresh and repairing their personal balance sheets then sinking money down the black hole that they've been putting money into all these years:

The plan is also guilty of kicking the can down the road. The lower monthly mortgage payments under the plan last for only five years, and for many homeowners deeply under water, it makes no sense to keep paying on their mortgages no matter how affordable the payment is. Why spend $5,000 fixing your roof if you are already under water by $20,000? That's why many of these homeowners will ultimately land back in foreclosure.