Tom Hanna's Lifestream

Despite all the wonderful analysis and insight from leading economists (see this at Cato, for example), I think Arnold Kling says it best in his posting about mortgage loan restructuring:

Advocates of loan restructuring point out that foreclosure is a costly process. Guess what? Loan modifications, particularly in a market like this one where they are likely to fail, can be even costlier. There is a lot of overhead involved in doing loan mod.

...  Loan modifications undermine the honesty of the market. They delay the necessary adjustments. With foreclosures, it might take two years for the housing market to find a bottom. With loan mods, it will take at least ten years.

Why is loan restructuring so popular? I think it's because people are in denial. They want to think that there is some feel-good way to avoid severe adjustments in housing. But loan restructuring will worsen the pain, not relieve it.I have nothing against restructuring mortgage loans if it is the lenders doing so, in negotiation with borrowers, to minimize the costs on loans that will eventually turn out to be good loans. But, as Kling says, when the govt forces lenders to restructure loans that would otherwise end up in foreclosure, I see nothing more than prolonged and increased inefficiencies.