Obama’s plan to save the housing market (and, with it, the economy) relies on mortgage modifications: Specifically, reducing monthly payments so strapped borrowers can stay in their houses instead of getting foreclosed on.

It’s a nice idea, but it isn’t working. 

Here’s a compendium of the reasons why, many of which are drawn from this excellent Joe Nocera article.

The Obama program is just a drop in the bucket.  About 131,000 mortgages have been modified so far, most on a trial basis (the idea is to test whether borrowers can actually make the new payments before making them permanent).  That’s better than nothing, but it’s less than 5% of the 3.5 million foreclosures expected this year.

Mortgage servicers aren’t staffed to modify mortgages…they are staffed to accept payments and/or initiate foreclosure proceedings.  Modifying mortgages requires a different skill set, namely underwriting analysis.  To modify a mortgage, the servicer has to figure out what payments the borrower can actually afford.  So far, they haven’t been in the business of doing this, and it’s hard to turn on a dime.  This is why so many homeowners who are interested in modifying their mortgages aren’t getting calls returned.

Some delinquent mortgage owners "self-cure"…so why should the bank give something away for nothing when the problem might go away on its own?  Anyone would like to pay less if you offer to let them do so.  But if you gently say, sorry, you agreed to these terms and we’re sticking to them, some borrowers will actually eventually do what they promised to do (which is better for the banks).

A $1,000 government payment isn’t enough to compensate servicers for the hassle.  A free $1,000 per modified mortgage sounds like a lot, but after one considers the weeks of back-and-forth with the homeowner, the analysis, the paperwork, etc., it isn’t. 

If banks modify mortgages, they have to write down the value of the loan.  This is a big one.  Remember, our bailed-out banks are now telling the world that they’re profitable again.  They’re also claiming that their balance sheets have been purged of the godawful loans that they made or bought from 2004-2007.  If the banks actually modify a loan, they’ll have to admit to their accountants and the public that it’s not worth