The U.S. Treasury has conceded that its plan to alter troubled homeowner’s mortgages had little overall impact. One expert explains why the program failed, and how to end the mortgage crisis once and for all.

The Treasury conceded its Home Affordable Modification Program as a bust after statistics revealed a record-breaking 14.4% of homeowners were either in foreclosure or delinquency due to therir mortgages by the end of September 2009.

The $75-billion program sought to ease the burden on homeowners by decreasing interest rates on their loans, so their monthly mortgage payments were affordable. But that was one of the program’s fatal flaws, according to Laurie Goodman, Senior Managing Director for Amherst Securities Group.

As head of mortgage strategy at Amherst, Goodman says she’s researched the Treasury’s program extensively and discovered:

• 70% of of modifications that involved interest cuts (rather than reductions on the principal borrowers owed) failed during the first 12 months, and
• The average monthly payment for borrowers during the first year was cut by 34%. In past situations where mortgage payments were cut by a similar margin, 65% of borrowers fell back into delinquency further down the line.

Goodman claims the program doesn’t adequately address the root cause of most mortgage defaults – the fact that a borrower ends up owing more on the home than it is actually worth. Cutting interest rates or mortgage rates temporarily actually adds on to the negative equity a homeowner generates long term, which means the existing program may actually serve to exacerbate the problem.

Also, the program failed to take into account any other revolving debts the homeowner’s built up. Credit card debt, student loan debt, car payments … any number of factors that reveal whether or not a homeowner is capable of handling any type of monthly mortgage payment.

These factors, Goodman insists, need to be factored in to any government program that seeks to end the mortgage crisis once and for all.

What do you think? Is Goodman’s assessment correct? If not, what does the country need to do to stop the bleeding and help homeowners increase their home equity?

We’d love to know what you think in the comments section below.

Source: “Why Treasury Needs a Plan B for Mortgages,” by Gretchen Moregenson, New York Times, 12/6/2009