Our government suffers from a naivete with some of its plans to resuscitate the economy which consumers simply cannot afford.  To be more specific, the current administration needs to come to terms with the fact that business practices are dictated by laws and potential for profit.  Businesses cannot, and should not, be counted on to change their policies out of the goodness of their hearts.

Last March, the Obama administration put into place its Mortgage Relief Plan to help homeowners stay out of foreclosure by urging banks to institute loan modifications for borrowers.  Renegotiation of their loans would allow borrowers to make payments on a more affordable rate, allowing them, in theory, to keep homes that would otherwise go into foreclosure.  Since its launch last March, the plan has provided permanent loan modifications to only 4% of those who have attempted to sign up.  Lenders like Bank of America have helped only .06% of the people who’ve requested a modification.

Banks explain the poor performance of the Mortgage Relief Plan as a lack of responsiveness on the part of the borrowers.  They offer that most people who sign up for the program have failed to file the lack of necessary paperwork that would give them the chance to renegotiate the loans.  Its hard to imagine, however, that of the ~160,000 Bank of America customers who signed up for assistance through the program last month, only 98 of them were concerned enough with monthly payments, which they could not afford, to make sure they’d gotten in all the necessary paperwork.  Even the most successful lender, GMAC, only renegotiated 7,600 loans into a permanent modification.  Are we to assume that people who are going to lose their houses cannot be bothered to fill out a form?

A much more likely reason for the failure of the Mortgage Relief Plan is that the loans to be renegotiated should never have been approved in the first place, and that the borrowers are too risky, financially, to lend themselves to renegotiation.   Allowing these borrowers to renegotiate for better loans is, simply, bad for business especially considering that in most cases, their situation has only worsened with the recession.

Bottom line:  the program is a failure.  It gives false hope to homeowners who are desperate for any means by which they might keep their homes.  As a result, desperate homeowners are wasting their time filling out paperwork for a program that has managed only to help 4% of the homeowners who have signed up. The Treasury department needs to acknowledge failure and either scrap the Mortgage Relief Plan or restructure it so that it can have an impact.

Finally, click here for an excellent graphic from the New York Times that illustrates the slow progress on the home loan modifications.