Fannie / Freddie unveil their loan modification program

One would think that the entities holding $5 trillion in mortgage debt revealing their loan modification program would be a big deal. Supposedly streamlined loan modifications will be what saves the market and the borrowers from the debt burden they got themselves into. Unfortunately the reality is that few loan modification programs strike a balance between the incentivizing the borrower to stick with the loan or convincing the lender to take the haircut. The GSE loan modification model is a horrible deal for the borrower and it is hard to see where someone will take the loan modification and have their long term situation improve in any way.

Here are the basic steps for a Fannie/Freddie loan mod. (PITIA is Principal, Interest, Taxes, Insurance and Association dues)

1. Taking any delinquent payments add it back into the loan.
2. Extend the loan term to 40 yrs, if PITIA is above 38% go to step 3
3. Reduce interest rate down to 3% in .125 increments to attain a 38% PITIA. If the final interest rate is at or above market rates then fix the interest rate on the loan for the life of the loan. Otherwise interest rate stays fixed for 5 years and then moves up 1% a year until it matches market rates at the time the loan is modified. If PITIA is above 38% go to step 4.
4. Principal forbearance. Put the amount of principal necessary to bring the loan amount down enough to get the PITIA below 38% as a balloon payment due at the end of the loan.

The 38% PITIA as a sustainable housing payment is insanely high. It isn't even total PITIA this is all about the first lien mortgage and no other mortgage debt or any other debt is taken into account. Loan modifications programs should be designed to be sustainable if they have any chance of success but they instead are designed to milk as much cash flow out of the borrowers before the inevitable default. Also the property has to be more than 90% LTV of the mortgage being modified. This program is just like Hope 4 Homeowners, blatantly structurally flawed in such a way to ensure the programs failure. The only logic I can behind unveiling such a program is show the politicians they are "doing something" even if what they are doing will have little to no effect on the marketplace. For many borrowers in bubble areas it seems like stopping payments and saving money and staying into the home until you get kicked out is the most financially sound decision they can make. I don't see the GSE loan modification program changing the calculus of that decision much at all.