It turns out I was right about the mortgage modification plan passed back in July and implemented in October. Here’s what I said then: 

Now, here’s the deal-breaker. The old mortgage company has to agree to write down the loan to 90% of the current appraised value and forgive the remainder. CNN correctly points out “that will mean a substantial loss for the lender.” A new mortgage company issues a new loan for that 90% (some sources are saying only up to 85% — where is our cash-strapped homeowner going to get that 5% difference?) and the old mortgage company has to accept it as full and final payment. One of the mortgage companies has to pay FHA a 3% insurance premium up front.

As for the homeowner, they will have to pay an insurance premium to the FHA every year of 1.5% of the principal. In addition, they will have to share any profit on the house with the FHA (100% the first year, declining to 50% after the 5th year, plus a 3% exit fee). The homeowner also must accept strict limits on equity loans.

Or, to put it briefly, no mortgage company is going to go for it, and even if they did there are reasons homeowners might not want to participate.

Here’s what the Secretary of HUD told the Washington Post: 

The three-year program was supposed to help 400,000 borrowers avoid foreclosure. But it has attracted only 312 applications since its October launch because it is too expensive and onerous for lenders and borrowers alike, Preston said in an interview.

He went on to blame Congress.

There are a lot of reasons it’s hard to put mortgage modifications in place. Loans that are sliced and diced before being bought and sold are one of them, and you can’t solve that problem without utterly destroying the market for mortgage backed securities (who is going to buy something that Congress can change or declare worthless at a whim?).  Borrowers who can’t afford much and property values that have declined below the amount owed are part of the problem. Congress tried to address those problems, but they’re hard to overcome.  

Mr. Preston is right that this program is a failure.  On the other hand, I haven’t heard him come up with a better idea.